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MANAGING COST
RISK
BY ØYVIND SÆTREN
CONTROLLER/BUSINESS DEVELOPER
AND MORTEN NILSEN
PORTFOLIO MANAGER - KINECT
Pelagia – who are we?
• Leading fish processor – 26 factories
• Norway, UK, Ireland, Denmark
• Ca 150 000 M3 freezing store capacity
• 765 000 tons raw material (2017 Auction)
• We need to produce in the fishing seasons
• High energy consumption, especially winter
and autumn when energy prices are high
Hedging – what do we mean?
Hedging is all the things we do
when we buy OR sell
AS LONG AS we stay within my
needed physical volume
Pelagia – our energy strategy
• We need predictability – but also flexibility to follow the
market when prices fall
• We now hedge up until 80% of our consumption, up from
60%
Pelagia – status active hedging
• We decided active hedging – buying and selling
• We benchmark against spot prices
• 2017 – low spot, our cost was close to spot
• 2018 – rising spot, our cost not rising
• 2018 so far: Our cost is ca 8,2 øre/kwh lower
than spot
1. The more volatile the market – the more need for hedge
2. A flat market – no need to hedge or ?
3. Hedge against increasing prices and decreasing prices
Do you need a hedging strategy
Why do we sell when we are buyer ??
• We expect that active hedging gives us lower cost
and more control
• Easier to take decision, when we know we can
change position
• Market is clearly trending: • We want to be protected in a rising trend
• We want to follow spot in a falling trend
• We change position to follow the trends
• We recommend to start with 20-30% of your cost
in active hedging, and increase when you have
experience
Why do we hedge?
1. To reduce ups and downs in
the electricity price
2. Know more about the cost in
the future
3. Reduce the cost
How do we hedge?
1. Buy when the price increase
2. Sell when the price is falling
= 90 % hedged
~10 years experience in managing electricity cost
IF THE CONTRACT
PRICE INCREASES OR
DECREASES FOR FIVE
WEEKS IN A ROW:
– WE DO SOMETHING!
Totally we have nearly 15% lower cost than the market cost
Electricity
0,0
10,0
20,0
30,0
40,0
50,0
60,0
70,0
80,0
03
.01
.20
05
03
.05
.20
05
03
.09
.20
05
03
.01
.20
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03
.05
.20
06
03
.09
.20
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03
.01
.20
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.05
.20
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03
.09
.20
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.01
.20
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03
.05
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03
.09
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11
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03
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16
1 year forward&
PM Price day by day until delivery
PM Price 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
In a falling trend we have
slightly higher cost than the
spot market
In a rising trend we have
significantly lower cost than
the market
Using the same hedge strategy as in Electricity - 21% saving against market
Gasoil – Yes a volatile market as well!
How we start with Gasoil hedging:
• We start carefully
• Basis: No hedge on 80% of the cost
• Challenge Strategy: 20% active hedging
• If the challenge strategy beat the basis
Increase from 20 to 40%
20,00
22,00
24,00
26,00
28,00
30,00
32,00
34,00
36,00
jan.11
feb.11
mar.11
apr.11
mai.11
jun.11
jul. 11 aug.11
sep.11
okt.11
nov.11
des.11
jan.12
feb.12
Y-2012 contract
Salmon – very trending market
20,00
25,00
30,00
35,00
40,00
45,00
50,00
55,00
mar
. 14
ap
r. 1
4
mai
. 1
4
jun
. 1
4
jul.
14
au
g. 1
4
sep
. 1
4
ok
t. 1
4
no
v. 1
4
de
s. 1
4
jan
. 1
5
feb
. 1
5
mar
. 15
ap
r. 1
5
mai
. 1
5
jun
. 1
5
jul.
15
au
g. 1
5
sep
. 1
5
ok
t. 1
5
no
v. 1
5
de
s. 1
5
jan
. 1
6
Y-2016 contract
52,00
54,00
56,00
58,00
60,00
62,00
64,00
66,00
nov.17
des.17
jan.18
feb.18
mar.18
apr.18
mai.18
jun.18
jul.18
aug.18
sep.18
okt.18
nov.18
Y-2019 contract
Concluding remarks
• We started sceptical: • Spot was good, or is there a better strategy? • Why should we both buy and sell?
• We seeked advice and made a strategy • and got buy-in from management
• We started conservativewith only a part of our volume
• You know the market! • Teamwork • Defined rules • Patience, loyal to the strategy • Budget security
• We do not need to make many decisions
• 1-5 decisions a year is probably more than enough in salmon!
… remember the
glass of water!
This glass of water illustrates that buying and
selling are both two sides of the same strategy.
The glass is the boundry
• The filling level is a function of the market
Last, but not least…
THANK YOU!
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