Local companies urged to hedge commodities

The Northern Bank has urged Northern Ireland companies to consider offsetting the impact of possible military action against Iraq on their bottom line.

Northern Bank's Commodities Risk Manager James McClenaghan said: "The continued volatility and uncertainty on the international stage could affect fuel prices and many Northern Irish companies depend on fuel either for the distribution of their products and services or to run their manufacturing premises."

With this in mind, the Northern Bank has announced the introduction of a new Commodities Risk Management service. Believed to be the first of its kind offered by a local bank, Commodities Risk Management is the practice of hedging against the price of various commodities such as oil, energy, sugar, cotton and base metals.

Hedging allows companies to actively manage their exposure to the fluctuating prices of these commodities. Northern Bank is also looking into the possibility of weather hedging, something which should appeal to the agricultural industry.

"In an increasingly sophisticated business environment, companies today hedge against foreign exchange and interest rates. The practice of hedging allows companies to plan their financials without worrying about whether extreme fluctuations in prices of commodities could impact their costs and profits," said Mr McClenaghan.

Whilst a majority of businesses today actively manage their interest rate and currency risk, most have not considered hedging commodities price risk although historically, the price of oil products and in particular crude oil have proven to be more volatile than either interest or foreign currency rates.

"The price of fuel is impacted on by political tensions, the threat of military or terrorist activity, supply (whether OPEC is restricting supply) and demand (economic growth). In the global environment which businesses operate in today, it would be a very short-sighted company indeed that didn't pay attention to what was happening on the world stage.

Commodities Risk Management offers a way for companies to plan for any eventualities during the business cycle," concluded James.

No longer just an option for large companies with huge overseas markets, any mid-sized company with an exposure to over £500,000 of a commodity risk in its line of business.

(SP)