1. Why should global commodity and energy prices be on the CFO’s agenda?
Global commodity and energy prices are core external variables that affect financial results directly, especially in production, transport, construction, food, chemicals and export-oriented sectors. Price movements in oil, natural gas, electricity, iron and steel, copper, aluminium, grains, cotton and similar products can change a firm’s purchasing cost, gross margin, inventory policy, working-capital need, selling prices and cash flow. The CFO should therefore monitor commodity prices. The real purpose is to determine in advance the channels through which price movements will feed into the financial statements and to update budgets accordingly. In firms that source a large share of their inputs from international markets, the total cost effect can be even larger when the commodity price and the exchange rate move together.
2. Production budgets and gross-margin analysis
The most direct use of commodity and energy prices is in production budgeting. If a manufacturer’s selling price remains fixed in the short run while the price of a key raw material rises, the gross margin can narrow rapidly. For example, in a firm for which steel accounts for 30 percent of production cost, a 20 percent rise in global steel prices produces, other things equal, an increase of about 6 percent in total production cost. The same logic applies to natural gas and electricity in energy-intensive sectors. If a lasting rise in energy prices is expected, contribution margins should be recalculated by product, the production plan for low-margin products should be reviewed, and the capacity to pass costs through to customers should be measured.
3. Sales-pricing decisions and cost-pass-through analysis
When commodity prices rise, the central financial question is how much of the cost increase, and how quickly, can be reflected in selling prices. In sectors with strong pass-through, the firm can protect its margin by transferring the increase to customers. Where competition is intense, contracts are fixed-price or demand is weak, the cost increase can reduce profitability directly. In long-term customer contracts, price-adjustment clauses linked to a raw-material index can share price risk with customers. Where such a structure cannot be put in place, the lag with which price increases are passed through should still be measured.
4. Working-capital and inventory-policy analysis
Fluctuations in global commodity prices also affect inventory decisions directly. Raising raw-material stocks in the expectation that prices will rise or supply will tighten can protect production; the same decision, however, ties up more cash in inventories. For example, a firm that consumes 2 million lira of raw materials a day and raises its inventory from 45 to 75 days requires about 60 million lira of additional inventory financing. If that amount is financed with credit, interest expense rises; if it is financed with equity, an opportunity cost arises. There are also storage, insurance, quality-loss and, in the event of a price fall, inventory write-down risks. The CFO should not therefore adopt automatically the approach of “prices will rise, so hold more stock”; the expected price advantage should be compared with the cost of holding and financing inventory.
5. Cash flow, liquidity and stress tests
Energy and commodity prices are also important inputs to cash-flow projections. In firms that use large volumes of imported inputs, a few months of higher prices can enlarge budgeted cash outflows substantially. The CFO should therefore include commodity-price scenarios in 13-week cash budgets and in annual cash-flow forecasts. In a stress scenario in which, for example, the Brent oil price rises by 15 percent, the natural-gas price by 25 percent or metal prices by 20 percent, the firm’s purchasing payments, EBITDA, free cash flow and minimum cash balance can be recalculated. The aim is less to forecast the right price than to identify the price level at which the firm begins to face a liquidity problem. Credit lines can then be increased, investments deferred or the purchasing programme rearranged before the need materialises.
6. Assessment together with currency risk
For firms in Türkiye a global commodity price is not sufficient by itself, because many commodities are priced in US dollars or euros. Lira costs are therefore shaped, roughly, by the relationship “international commodity price × exchange rate.” Even if the dollar price of copper is unchanged, a 15 percent rise in the USD/TRY rate can raise the lira cost of the input by about the same amount. Conversely, a fall in the commodity price may not reach the firm at all if the exchange rate is rising. The CFO should therefore analyse commodity and currency risk not separately but as a combined position. Constructing joint scenarios for both the commodity price and the exchange rate in the budget shows true cost sensitivity more accurately.
7. Hedging with derivative instruments
Uncertainty in commodity prices can be managed in part through financial derivatives. Futures and forwards help to lock in a future purchase price; options can protect against adverse price movements while preserving the opportunity to benefit from favourable ones. Swaps can be used especially by firms with regular and continuous commodity consumption. A hedge decision should nevertheless be taken to protect budgeted cash flow, not to seek speculative gain. A firm that will buy 1,000 tonnes of aluminium in six months’ time can, for example, hedge all or part of the price in order to secure the cost in its budget. In setting the hedge ratio, expected consumption, contract tenors, liquidity, counterparty risk and accounting effects should be taken into account. Physical supply risk and price risk are also different: a derivative can lock in the price but does not guarantee that the product will be available.
8. Investment and capacity-decision analysis
The lasting direction of commodity and energy prices can also change investment decisions. If energy costs are expected to remain high for a long period, the economic value of energy-efficiency investments increases. The payback period of less energy-intensive machinery, waste-heat recovery, solar power, storage or the renewal of production processes may shorten. Likewise, if the price of a particular raw material is rising structurally, the use of substitute materials, supplier diversification or a shift of production to another geography may come onto the agenda. When investment projects are evaluated, it is useful to analyse not only the current commodity price but how NPV and IRR results change under different long-term price scenarios.
9. Financing cost and macro-financial linkages
Energy and commodity prices affect not only firm-level costs but also macroeconomic conditions. In energy-importing countries a rise in oil and natural-gas prices can widen the foreign-trade deficit and raise inflation; that, in turn, can feed through to firms’ financing costs via the exchange rate, interest rates and the country risk premium. The firm may then at once buy more expensive raw materials and have to borrow at a higher interest rate. This two-sided effect is especially important in highly leveraged and energy-intensive firms. Lasting rises in commodity prices should be included as an indirect macro risk factor in WACC assumptions, in the borrowing strategy and in refinancing stress tests.
In practice it is neither sensible nor possible to monitor every commodity price. A small “watch list” of commodities that are truly critical to the firm’s revenue and cost structure can be formed. For a metals producer, steel, scrap, iron ore, energy and USD/TRY may be the relevant set; for a food company, wheat, maize, sugar, vegetable oil and energy; for a logistics firm, oil and the exchange rate. For each indicator, the budget price, the realised price, the variance, the hedge ratio and the sensitivity of EBITDA can be monitored together. Commodity data then cease to be market indicators followed passively and become a direct input to the financial decision system.
The CFO should assess together whether a price move is lasting or transitory, its weight in the cost structure, the exchange-rate effect, the power to pass prices through to customers, and the scope for hedging. The most useful approach is to monitor commodity prices through the effect they produce on the firm’s gross margin, EBITDA, free cash flow and liquidity.
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