With the prices of energy and other commodities hitting historic highs, companies around the world are making the hedging of their energy commodities exposures a top strategic priority.
That is generating a bonanza for the relative handful of investment banks and other dealers that have made a specialty of OTC commodity derivatives, according to new research from Greenwich Associates.
In its 2008 Global Commodities Research Study, which surveyed 420 companies around the world , Greenwich notes that the spike in commodities prices has had a profound impact on all kinds of businesses, many of which have moved to protect themselves by using financial instruments to hedge their exposures. And while the ongoing commodities boom is creating new opportunities for dealers across the board, the ones benefiting the most – surprise, surprise – are the dealers that have historically dominated the market.
In particular, the survey found, this dynamic continues to favour Goldman Sachs and Morgan Stanley, the two firms cited most frequently by companies in Asia, Europe and the US as active OTC derivatives trading relationships. The two investment banks tie for first place on Greenwich’s so-called Quality Index, which aggregates ratings awarded by actual clients of all the major dealers. The next tier of dealers on the index – Barclays Capital and JPMorgan Chase – also maintain significant OTC derivatives franchises among global corporate energy users, while others that also rated highly in terms of franchise size included BP, Citigroup, Deutsche Bank, and Société Générale. Of all the competitors, though, BarCap is the only one behind Goldman and Morgan Stanley that has built a significant client base in each of the world’s major regional markets, notes Greenwich.
The participants in Greenwich’s survey also voted for top honours to four energy companies and two airlines for having the world’s most sophisticated strategies for hedging energy exposure. They are: BP; Constellation Energy; Exxon Mobil; Lufthansa; Shell Group; and Southwest Airlines.
The study found that companies around the world use financial instruments to hedge an average 45 per cent of their energy commodities exposure. Included in that average is the 53 per cent of commodities exposure typically hedged this way by companies that are consumers of energy and the 37 per cent of financially hedged exposure among energy producers.
Airlines and other transportation companies are much more active than other energy commodities consumers when it comes to hedging using financial instruments, with nearly 65 per cent of their total exposure hedged in this way. In comparison, the typical industrial company uses financial instruments to hedge just over 40 per cent of its exposure, and utilities hedge an average 48 per cent.
In carrying out their financial hedging strategies, slightly more than 70 per cent of the survey participants said they use OTC swaps. Just over half use OTC options and roughly a third use structured derivatives. Fifty-eight per cent of the companies also say they actively trade physical products with dealers.
Across all industries, hedging strategies vary widely in terms of sophistication and approach, notes Greenwich. Many participants in the 2008 survey said they have no actual hedging policies at all or carry out their hedging through a largely subjective process. Others, especially airlines and oil companies, use advanced formulaic strategies to hedge individual commodities exposures and make strategic decisions about hedging policy at the board level.