How does an industrial group manage commodity risk?

May 23, 2018

 

The upcoming ComRisk Forum is primarily designed for risk professionals within trading companies. But not only. Companies that produce commodities or consume them are an important part of the supply chain and have to face similar risks, on top of some very specific ones. To find out more about this, we’ve had a chat with Benjamin Baptiste, Head of Risk Management at Roquette, ahead of his talk at the Forum.

 

 

 

 

1: You work for an industrial group – Roquette, what are the main risks you are exposed to as a commodity consuming company? 

 

"Major risk for an industrial company such as ROQUETTE is a business interruption due to industrial issues or raw materials shortage."

 

Major risk for an industrial company such as ROQUETTE is a business interruption due to industrial issues or raw materials shortage. It is the most critical because in addition to the direct financial loss, it could have an important impact on our customer’s satisfaction (delay or cancellation in deliveries) which is our top priority. You should never forget that before managing prices, the first objective of our Purchasing Dept is to ensure that we have physical raw materials with the required quality delivered on time in our different plants.

"As a big commodity consumer, more than 50% of our costs are variable costs (mainly raw materials and energy)."

This was the most critical risk but with a quite small probability to occur. We have to also focus on price risk management (on our variable margin) because as a big commodity consumer, more than 50% of our costs are variable costs (mainly raw materials and energy). As you can imagine, price variation on those products have a strong direct impact on the financial performance of the company, and this risk is present every day. It’s really crucial to set up a relevant risk framework and organization to manage market risks.

"With the current digitalization, we need to focus particularly on cyber risks and frauds through IT breaches."

Safety and Security is also fundamental as an industrial company and with the current digitalization, we need to focus particularly on cyber risks and frauds through IT breaches.

 

2:  How do you ensure a dynamic approach to risk management?

 

You need to have the right people with appropriate tools, in order to produce every day (or as often as possible) a clear picture of positions and associated risks. You also need a relevant risk framework with sufficient delegation to enable stakeholders to react very quickly to specific situations.

"You need to ensure the quality and the accuracy of your database which is the starting point of all your analysis and calculation.
Do not neglect this “back office” task!"

As a last crucial point, you need to ensure the quality and the accuracy of your database which is the starting point of all your analysis and calculation. Do not neglect this “back office” task!

 

3: During ComRisk 2018, you will be presenting on Risk assessment, risk framework and performance measurement - The perspective of an industrial group’, can you give us more details about what you intend to cover in that session?

 

I quickly realized when I started to work in Risk management for an industry that one of the most difficult questions is to define when considering that a risk appears, what the “neutral risk benchmark” is. It is key to answer this question because it is the foundation of the risk framework, organization and performance measurement you have to set up. After 8 years working for an industrial company, I would like to share with ComRisk’s audience the main approaches you could imagine, giving more details on the choice made by ROQUETTE.

"One of the most difficult questions is to define [...]
what the neutral risk benchmark” is."

In a second part, I will also share with the audience some insights on how to master historical VaR computation including commodities underlyings and different currencies.

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