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Managing Business in Times of Volatile
Commodity Prices
Anja Strothkämper, Vice President LoB Solutions for Commodity Management,
Mannheim, September 12th 2012
© 2012 SAP AG. All rights reserved. 2
Legal Disclaimer
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© 2012 SAP AG. All rights reserved. 3
Agenda
Motivation for Commodity Management
SAP Solution Approach
SAP Solution Offering
Roadmap
Summary
Motivation
© 2012 SAP AG. All rights reserved. 5
Global trends and their impact on commodity management
Volatility fueled by market dynamics
Increasing demand in emerging markets (China
and India) is creating a tight balance between
supply and demand
Geopolitical uncertainties
Rising influence of hedge funds and financial
institutions
Increasing focus on risk management
Increased focus on risk management by crisis-
shaken executives, driven by the need to
protect earnings and keep company operations
running
Compliance with government
regulations like the Sarbanes-Oxley Act
Companies struggle to keep up and comply with
regulations like hedge accounting laws
Strong demand for business solutions designed
to meet these requirements
© 2012 SAP AG. All rights reserved. 6
Source: Commerzbank /Wirtschaftswoche – Commodity radar screen for March 2012
Commodity prices are volatile
Commodity Price Volatility is
constantly increasing for
commodities like Oil, Copper, Lead,
Zinc, Sugar and Wheat.
Volatility is significantly higher than
for currencies or interest rates
Volatility has a high impact on the
profit of many companies
Calculating and managing the
material cost for end products is
difficult
Liquidity and cash planning becomes
challenging
Hedging with financial derivatives can
be a strategy to manage the
challenges of volatility
© 2012 SAP AG. All rights reserved. 7
Commodity management industries
Commodity producers
Industry examples
Oil
Mining
Agriculture
Commodity consumers
Industry examples
Automotive
Consumer products
High tech
Aerospace
Industrial machinery and
components
Defense and security; public
administration
Travel and logistics
Commodity converters
Industry examples
Chemicals
Metals
Mill products
Oil and gas (refining)
Utilities
© 2012 SAP AG. All rights reserved. 8
Buy raw material
containing copper
Loss by
copper
price
fluctuation
Revenue
from
Processing
fee
Negative
overall
contribution
margin
Sell refined
copper
2 Month
processing time
Copper Grade A – London Metal Exchange (LME)
Official Price Curve in US$/t – Cash Buyer
Example for a typical metal company:
August raw material purchase: 50,000 TO Cu, payable
95%
Purchase Price: 9,000 USD/TO Cu
(monthly avg August)
October refined material sale: 47,500 TO Cu
Sales Price: 7,300 USD/TO Cu
(monthly avg October)
Processing Fee: 400 USD/TO Cu
Loss of 1,300 USD / TO Cu processed (= 7,300 – 9,000 + 400 )
Total loss of 62 Mio USD for the month
Impact of Price Volatility for a Metal Smelter Un-hedged: High Risk Exposure
© 2012 SAP AG. All rights reserved. 9
Buy raw material
containing copper
Loss by
copper
price
fluctuation
Profit from
Futures
Derivatives
Sell refined
copper
2 Month
processing time
Copper Grade A – London Metal Exchange (LME)
Official Price Curve in US$/t – Cash Buyer
Example for a typical metal company:
Gain of 400 USD / TO Cu processed
Total gain of 19 Mio USD for the month
Impact of Price Volatility for a Metal Smelter Hedged: No/Low Risk and ensured profitability
Sell copper
Future
Buy copper
Future
Processing
fee
© 2012 SAP AG. All rights reserved. 10
Impact of Price Volatility for a Mining Company How do I secure my planned profit?
History Today Future
Contango (“optimistic”)
Forward curve (“Realistic
as of today”)
Cost & deductions
Backwardation (“pessimistic”)
Revenue @ risk
Evaluate Risk
2
2
Purchase Commodity
Future (Sell in 6 Months
7600 $)
3
3
“pessimistic” scenario becomes
reality. Revenue by future pays off
“loss/lost profit” for physical deal
4
4
Copper Grade A – LME
Official Price Curve in US$/t
– Cash Buyer
Where will the market be in the future?
What will my revenue & profit look like?
Sign Physical Sales
Contract (Del. +
Pricing in 6 Months)
1
1
© 2012 SAP AG. All rights reserved. 11
Impact of Price Volatility for a Mining Company How do I even increase my planned profit?
History Today Future
Copper Grade A – LME
Official Price Curve in US$/t
– Cash Buyer
Cost & deductions
Potential loss for
floating
Evaluate
Market, MtM,
Risk & potential
2
2
Potential gain for
floating
Purchase Commodity
Swap fix to float (now
risk exists)
3
3
“optimistic” scenario becomes
reality. Additional Revenue by
swap
4
4
Sign Physical Sales
Contract (Del. +
Pricing in 6 Months)
1
1
Contango (“optimistic”):
• Convert Physical
Deals Fix to Floating
(Swaps)
• Move QP further into
the future (1MAMA ->
3MAMA) for new
physical/spot deals or
via Swaps
• …
Backwardation
(“pessimistic”):
• Convert Physical
Deals Floating to Fix
(Swaps)
• Move QP to start as
early as possible
(3MAMA -> 1MAMA)
• Minimize Risk through
Futures/Options…
Increase Profit –
Know & monitor the market – use
competitive advantage & insight
Where will the market be in the future?
What will my revenue & profit look like?
SAP Solution Approach
© 2012 SAP AG. All rights reserved. 13
SAP’s approach to commodity management
Commodity management solutions from SAP
is one of the strategic investment areas within
SAP‘s Business Suite application platform
Leveraging SAP‘s core strengths in logistics,
finance and industry solutions
New cross industry organizational unit for
Commodity management
Dedicated development team for Commodity
management
Collaboration with customers and partners to
build solution roadmap and to develop best in
class solutions
© 2012 SAP AG. All rights reserved. 14
Commodity management solutions from SAP
© 2012 SAP AG. All rights reserved. 15
Commodity management – business building blocks
Commodity
purchase process
Commodity
sales process
Commodity risk management
Accounting
Commodity trading
Quality mgt.
Warehousing
Transportation
Manufacturing
Analytics
© 2012 SAP AG. All rights reserved. 16
Commodity management – our solution platform
Materials
management (MM)
Sales and
distribution (SD)
SAP Treasury and Risk Management application
Commodity pricing and invoicing
(CPE) Global Trade
Manage-ment
(GTM)
Commodity management specifics
Commodity management specifics
Commodity
management
specifics
Quality
management
Production
planning
Supply chain
management
Transportation
management
Global trade
services
Accounting (financials and controlling: FI/CO)
More
SAP BusinessObjects portfolio
Commodity management specifics
© 2012 SAP AG. All rights reserved. 17
Commodity management solutions from SAP streamline processes across
procurement, sales, risk management and accounting departments
Compliance and
risk reporting
Hedge
effectiveness
and
accounting
Hedge
management
Procurement, sales,
and logistics
Contract
with
commodity
pricing
Order Credit
management
Fore-
cast
Settlements and
accounting
General
ledger
Provisional
invoice
Accounts
receivable
and payable
Deal
settlement
Differential
invoice
Risk
management
Transportation
and delivery
MTM: paper,
physicals. and
inventory
Exposure
management
Commodity
risk
reporting
Accounting Commodity risk
management
Commodity
sales and
procurement
Finance
Risk
review
Define risk
policy
Define risk
profile
Paper
trades
© 2012 SAP AG. All rights reserved. 18
A Journey to Maturity for our customers
Contract to Cash, Materials Management,
Finance
• Single view on revenue
across BU’s • Better control on
contract performance,
i.e. DSO
Commodity Sales Bulk Transportation
Scheduling & Execution,
Quality Management
• Improved shipment
schedule, reduced freight
costs, i.e. demurrage • Seamless integration in
contract to cash
• Visibility on scheduled transports and stock in
transit
Outbound Logistics S&OP,
Demand Planning, Supply
Planning, Supply Network
optimization
• Visibility on global customer demand
• Reduced supply chain
costs • Optimal inventories
across the network
• Increased service levels
Supply Chain
Planning Commodity Risk Analysis, Commodity Risk
Management, Commodity
Trading, Commodity Paper Trades
• Full transparency and
control over market price risk
• Auditable and real-time
visibility of exposure positions
• Better financial hedging
decisions • Compliance
Commodity Risk
Management
Process Enablement
Value
Time, Value & Competitive Advantage
Many of our customers have deployed our solutions in a sequenced approach and
increased productivity and competitive advantage over time
SAP Solution Offering
© 2012 SAP AG. All rights reserved. 20
Capture
contract
Create call-
off
Transport
and delivery
Provisional
invoice
Update
quality or
price
Differential
invoice
Differential
invoice based
on updated
information
and integration
to accounting
Contracts
with flexible
pricing rules,
incl. index-
based prices
Integrated
with Treasury
Full
integration in
SAP
Business
Suite
Update quality
characteristics
and prices
Provisional
invoicing
based on
preliminary
information
SAP Commodity Procurement and Commodity Sales End to End Process supported
© 2012 SAP AG. All rights reserved. 21
Commodity Pricing within a typical
Commodity Sales / Commodity Procurement process
Final Invoice
Define quotation sources
Average both quotation values and currency
conversion values over Quotational Periods
Quality based pricing on multiple
minerals/metals content
Agreed estimated quality with bonus and
penalty definition & calculation rules
Treatment charges
Rebates & Discounts
Sales Contract/
Order
Upload quotations from
multiple sources (LME, Reuters
or other reference prices) One-time definition
Provisional Invoice
Goods Issue
Differential Invoice
Commodity Price
calculation $ Final Assay 1st Assay
© 2012 SAP AG. All rights reserved. 22
SAP Business Objects Xcelsius Dashboard for Commodity Sales
Non interactive screenshot
© 2012 SAP AG. All rights reserved. 23
SAP Commodity Risk Management End to End Process supported
Fully supports
Hedge
accounting
Managing
physical risk
exposure
Assessing risk
Executing
hedging
strategy
Deal
administration
Accounting
and settlement
Hedge
accounting
Integrated
with Physical
Business /
Logistics
Up-to-date
Risk
Reporting
Full Suite of
Commodity
Instruments
Instrument
lifecycle
management
and integration
to accounting
Deal entry,
validation,
correspon-
dence
© 2012 SAP AG. All rights reserved. 24
Native Commodity Risk Management
• Increased transparency across multiple and diverse business units
• Key Performance Indicators (KPIs) measured and managed
Value proposition for integrated
SAP Commodity Risk Management
Logistics Integration
• Reliability and
timeliness of data, e.g. in position report
• Enables timely and
efficient hedging
decisions
• Lower TCO (IT)
SAP provides comprehensive end to end
processes for commodity risk management Accounting Integration
• Increase compliance
by reducing complex,
error-prone, and difficult-to-audit
solutions
• High degree of
automation
• Lower TCO (IT)
Roadmap
© 2012 SAP AG. All rights reserved. 26
Planned innovations Future direction Solution today
Overview of SAP road map for Commodity management
Enhanced Commodity Risk
Management
Enhanced Commodity
Procurement
Enhanced Commodity Sales
SAP
HANA
SRM*
GRC**
Credit management
Sales
Treasury
Procurement
*Supplier relationship management
** Governance, risk, and compliance
Commodity Risk Management
Commodity Procurement
Commodity Sales
© 2012 SAP AG. All rights reserved. 27
Rapid Deployment Solutions for Commodity Management Planned Innovations
Software
Quickly address the most urgent business
processes
Content
SAP best practices, templates and tools make
solution adoption easier
Enablement
Guides and educational material speed end user
adoption
Service
Fixed scope and price provides maximum
predictability and lowers risk
SAP Rapid Deployment Solutions
(RDS)
Service
Software
Enablement
Content
RDS Commodity
Risk Management
Q3
2012*
Q1
2013*
RDS Commodity
Risk Analytics
(powered by SAP
HANA)
RDS Commodity
Procurement
* Planned dates only
Summary
© 2012 SAP AG. All rights reserved. 29
Summary
• SAP delivers a commodity
management platform that leverages
the strength of SAP’s Business Suite,
launched with innovations in 2011
• SAP’s commodity management
solution provides integration between
logistics, risk management and
finance
• You can now begin to leverage the
commodity management platform
and work with SAP to shape the
future roadmap
Thank You!
Contact information:
Anja Strothkaemper
SAP AG
T +49 6227 7-64398
M +49 160 88 96 587
Vice President
Commodity Management
LoB Corporate Functions
© 2012 SAP AG. All rights reserved. 31
© 2012 SAP AG. All rights reserved.
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