Capital markets aficionados operate under the mathematical certainty that the greater the risk, the greater the reward.
But risk can be a dirty, four-letter word to executives at old-line industrials.They’re the sorts who don’t like therisks associated with commodities, treasuries,energy, or currencies. Especially
commodities and currencies. Volatility in both sectors has wrought havoc on corporate profitability during the past 12months. The obvious solution is hedging.
But what kinds of hedges and what types of financial instruments are most effective?
Two of the region’s leading financiers recently shared their thoughts about hedging strategies at the EuroFinance Cash Management conference and offered valuable advice on coping with a turbulant market.
Arijit Shome is group treasurer for Almarai Co., a dairy company that’s a household name across the Middle East. The cardinal rule for successfully facing any type of risk is to focus on your core business. For Almarai, it’s food. “If you diverge from your core business, you bring in more uncertainties that you need to manage,” he said.
So what’s keeping Shome up at night?
For starters, currency risks. He said he had luck with an active hedging program to get him close to what he had planned at the beginning of the year. Available structures may look attractive, but you need to manage underlying exposure, he said.
Add to the currency swing some interest rate fluctuations. Shome said that Almarai tries to keep exposures open. With various banks and products to hedge, a corporate treasurer has plenty with which to arm his company. It’s also helpful to look at currency swings relatively. “It’s not good
or bad – it’s relative. If the rate is at 5 percent and I took a fixed rate swap at 6 percent,
then you need to keep in mind what was going on at the time,” Shome said.Then there’s commodity prices. Almarai’s not involved in commodity hedging, but enters into long-term contracts
with suppliers, according to Shome. Could that policy change? “Sure. Going forward
we’re most likely going to be looking into hedging feedstocks,” he said.
Mussab Abdulmajid Al-Wohabe is group treasurer at Saudi Arabian Amaintit Co., the region’s leading pipe manufacturer with a diversified clientele, 35 plants and a presence in 18 countries. That means
he’s constantly facing a basket of risks: economic, political, commercial, credit,
and currency prices are the most common.
Al-Wohabe said that pig iron price volatility caused a sensation a couple years ago when a ton of the material went from $400 to $1,200 to $300 over the course of a year. “This type of fluctuation could put you out of profitability during an 18-month project unless you mitigate the risk. You don’t want your balance sheet affected by huge back-up of inventory,” he said.
Targeting commodity prices to a basket of prices worked for Saudi Arabian Amaintit Co. So did a central warehousing system, according to Al-Wohabe. Another strategy has been to take a 5 to 10 percent stake in the company’s raw material suppliers.
The very best way to cope with risk is money. “The key is liquidity. When you have that, you can void risks and tap into more opportunities in the market,” he said.

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