Cutting commodities as a hedge against inflation is now a ‘team sport’: Chatham

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Diving Brief:

  • A growing number of companies are taking steps to mitigate commodity exposure within their business in the face of persistent inflation, said Amol Dhargalkar, Chairman of the Board, Managing Partner and Global Head of Corporates for global financial risk management firm Chatham Financial.
  • Companies are moving from a siled approach to managing this kind of exposure to a more team-centric approach, he said, involving different parts of the organization in the process – which forces companies to carefully collect and consolidate various sources of data. in a place.
  • “What we’ve generally seen here is that the first step is just to understand the scope and size of the challenge itself,” he said in an interview. “Mastering data on a consolidated basis across the world can be very difficult. And then, once you get your hands on the data, the real question is, can we actually do anything about it? »

Overview of the dive:

When approaching commodity exposure in a rising price environment, companies need to think carefully about how they collect and use disparate data, which means there is no single strategy for companies seeking to hedge against this type of risk, Dhargalkar said.

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

Reducing their exposure to commodities has become a priority for companies as a hedge against inflation as it continues to soar. The companies’ approach to mitigating this has always rested outside the realm of chief financial officers or treasurers, said Dhargalkar, a 21-year veteran of Chatham Financial who became the company’s chairman last April according to his LinkedIn.

Companies have traditionally focused more on adjusting procurement or their supply chain strategies — focusing on physical rather than financial contracts, in other words, he said — to mitigate such risks. This has changed in the wake of current trends.

“What we see and have seen over the past year is a desire to bring together, for lack of better conditions, the physical and the financial,” he said.

Dhargalkar cited exposure to natural gas as a key example, noting that a Chatham customer in Europe ultimately made the choice to lay off several of its supply employees due to a lack of gas coverage. Moving to cover financial exposure in this area has since become a priority for the client, he said, following rising prices and the cost of running their facilities.

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

As fears surrounding a potential recession persist, Federal Reserve Chairman Jerome Powell on Wednesday reaffirmed the Fed’s determination to bring soaring inflation under control – although Powell acknowledged that this would “probably – most likely – some pain”.

Recession fears and aggressive central bank action will see global markets stabilize and potentially recover through the second half of the year, according to a statement from global investment firm Russell Investments on Tuesday. 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 statement.

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