Commodity risk management is emerging as a critical differentiator of business performance.

The ‘new normal’ is a world of significant commodity price volatility affecting many businesses across different industry sectors and across the full value chain of their activities. Many leading companies have established Commodity Trading and Risk Management (CTRM) ‘functions’ which are delivering significant performance and control improvements.

The leaders are further down the path and are setting clear CTRM standards, while others still have a way to go.

In the Energy sector, the management of the price volatility of the commodity and the optimisation of supply with demand are keys to the overall performance of the company. Organisations have established centralised commodity trading operations, optimising the value of the physical flow of the commodity, trading around the physical flows to add further value, using financial derivatives to manage exposures and in some instances, holding proprietary trading positions.

In these businesses, the trading operation sits at the hub of the company, often holding ownership of the commodity inventory and managing the ‘manufacturing’ and customer supply activities to deliver value. Such companies typically apply ‘active trading’ strategies, managing the underlying risks within defined limits using tight governance and control standards. Differentiation happens through differences in ‘risk appetites’, with some being active market makers, some ‘hedgers’ and others structuring more simplified risk and commercial strategies. Banks have played a key role in providing liquidity for these activities in the energy markets. Some Investment Banks and independent Trading Houses have bought into physical assets to support their trading activities; the markets have become more ‘vertically integrated’.

PwC can help

We have a global network of over 200 CTRM specialists who can bring insights and good practices to your CTRM challenges:

• Strategy – Risk appetite, Capital/asset allocation, Trading strategy, Supply chain optimisation, Product design, Contract structuring.
• Risk management – Risk analysis and models, Policy, Reporting, Valuation methods, Risk metrics and limits.
• Governance and control – Product control, Fraud risk, Accountability and decision frameworks, Governance frameworks.
• Operating model – Roles and responsibilities across the business, Organisation (including back/front office structures), Location analysis, Entity structures, Book structures, Talent, Performance management frameworks.
• Technology and data 7ndash; Data and systems architecture, Data modelling, Systems strategy, Package selection, implementation and review, Programme and change management.
• Process – End to end process design, Documentation, Training, Learn/continuous improvement, Standards and delivery models.
• Accounting – Accounting standards, Financial reporting, Audit.
• Tax – Planning, Compliance and reporting, Indirect and direct tax structures, Personal tax.
• Regulation – Compliance with European, US/DFA and Asian legislation.

Our Global CTRM teams operate from our offices in the USA (Houston and Atlanta), UK, The Netherlands, France, Germany, Switzerland, Singapore and Australia. We work with clients to address issues in all commodity markets and geographies: Oil/Gas, Power, Metals and Soft commodities. Our CTRM specialists have access to the extensive breadth of additional PwC services where these may be required. Our team works particularly closely with our Banking and Capital Markets colleagues as their insights are often valuable to our corporate clients.