Cutting Commodities as Inflation Hedge Now ‘Team Sport’: Chatham

(CFO Dive) - 
Dive Brief:

  • A rising number of firms are taking steps to mitigate the commodities exposure within their business in the face of persistent inflation, Amol Dhargalkar, board chairman, managing partner and global head of corporates for global financial risk management firm Chatham Financial said.   
  • Firms are shifting from a siloed approach to managing this type of exposure in favor of one that is more teams-based, he said, involving different parts of the organization in the process — something that requires firms to carefully collect and consolidate various sources of data in one place.
  • “What we’ve generally seen here is the first step is just getting an understanding and the scope and size of the challenge itself,” he said in an interview. “Getting your arms around data on a consolidated basis across the globe can be very challenging. And then, once you get your hands on the data, the real question is, can we actually do anything about this?”

Dive Insight:

When addressing commodity exposure in a rising price environment, companies need to think carefully about how they collect and utilize disparate data, something that means there is no one-size-fits-all strategy available for firms as they look to hedge against this kind of risk, Dhargalkar said.

“You want to make sure that your supply chain or procurement professionals are aligned with treasury professionals, and you don’t, for example, double your exposure,” he said. “And then you end up losing money if prices go down, so it really is a team sport.”

Reducing their commodities exposure has become top of mind for firms as a hedge against inflation as it continues to soar. Companies’ approach to mitigating this has historically rested outside of the CFOs’ or treasurers’ realm, said Dhargalkar, a 21-year veteran of Chatham Financial who became the company’s chairman this past April according to his LinkedIn.

Firms have traditionally leaned more toward tweaking procurement or their supply chain strategies — looking to physical rather than financial contracts, in other words, he said — to mitigate these kinds of risks. This has changed in the wake of current trends.

“What we’re seeing and have seen over the last year is a desire to bring for, lack of better terms, the physical and financial closer together,” he said.

Dhargalkar pointed to natural gas exposure as a key example, noting a Chatham client in Europe ultimately made the choice to let go of several of its procurement employees due to a lack of gas hedging. Moving to hedge for financial exposure in this area has since become more of a top focus for the client, he said, following the increases in pricing and costs to running their facilities.

“Now they’re working on a process where they are starting to employ financial hedges and actually engaging with financial derivatives, not just supplier contracts,” he said.

While fears surrounding a potential recession are still lingering, Federal Reserve Chair Jerome Powell on Wednesday reaffirmed the Fed’s determination to get a handle on spiking inflation — though Powell acknowledged doing so is “likely — highly likely — to involve some pain.”  

Recession concerns and aggressive action by central banks will see global markets stabilizing and potentially recovering throughout the second half of the year, according to a Tuesday release by global investment firm Russell Investments. A mild recession or potential slowdown rather than a deep recession are the most likely outcomes for the U.S. economy, Andrew Pease, the firm’s head of investment strategy, said in the release.

By Grace Noto
June 30, 2022


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