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Newly-Formed Company Faces Build vs. Buy Decision for Hedge Program
MARKETS: MANUFACTURING | COMMODITY: ALUMINUM & NATURAL GAS | CLIENT: ROLLING MILL

Situation

After its former parent company was required to divest its operations to satisfy U.S. Department of Justice requirements, an Aluminum Rolling Mill was acquired by an operationally oriented private equity firm that makes control investments in industrial businesses. The newly-formed company is the recognized industry leader in common alloy industrial products and has state-of-the-art automotive body sheet manufacturing capabilities. Volatility in the aluminum market made hedging a must and the new executive team faced a critical decision regarding establishing and managing its hedge management program. Procuring technology, process management, and the necessary expertise would be a costly path outside of its core expertise.  

Solution

Internal and outsourced options were both explored. The executive team assessed the technology needs for storing, valuing, and managing hedge positions, which included the potential use of workflow automation to match, approve, and digitally sign hedge confirmation and settlements. The team met with many experts to assess opportunities to better align hedges to the company's commercial commodity exposure.

The company ultimately chose AEGIS Hedging Solutions to manage its hedge program. AEGIS brought a robust technology platform that could be implemented quickly with no upfront capital expense. 

All stakeholders could access hedge program data in real-time from the platform and avoid costly upgrade cycles commonly associated with CTRM platforms given the cloud-based nature of the platform and ongoing investment from AEGIS.

Importantly, AEGIS also identified many opportunities to match physical sales and purchases with financial hedges, while improving the efficiency of the company's internal processes and workflows. AEGIS implemented a standing review and reconciliation process to ensure alignment between physical and financial positions.

Outcome

The newly-formed company had hundreds of critical decisions to make as it mapped its path forward. By leveraging the technology and expertise from AEGIS, the company was able to focus attention, capital, and efforts on establishing critical business operations and direct greater attention to supply chain and operational constraints stemming from COVID-19, knowing they were properly protected against commodity market volatility.

Within the hedge program itself, AEGIS facilitated the onboarding of additional financial counterparties to increase competition, resulting in meaningful annual cost savings. Operations, finance, and accounting departments each access market analytics, hedge data, financial transactions, and valuations in real-time. And the limited volatility in its commodity prices allows the company to deploy capital and resources efficiently to growing its business.
“After meeting with AEGIS to discuss our needs, it quickly became clear that the level of expertise, service, and technology solutions they could provide would be a perfect fit for our newly established company. As a midsize producer of aluminum products, building out and managing an internal risk management group would add additional expense and complexity that was competing with higher priorities. I couldn’t be more pleased with our experience thus far and I would recommend AEGIS to any business in our space faced with a similar decision. There is simply no comparable choice when it comes to the know-how, user interface, and need-based flexible solutions they offer.”
 
Chief Commercial Officer   |   Commonwealth Rolled Products

No representation is being made that any client will or is likely to achieve hedge profits similar to those discussed in this case study. This testimonial is not indicative of future performance or success. Commodity interest trading involves risk and, therefore, is not appropriate for all persons; failure to manage commercial risk by engaging in some form of hedging also involves risk. Past performance is not necessarily indicative of future results. There is no guarantee that hedge program objectives will be achieved. Neither this trading advisor nor any of its trading principals offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. This case study is not required to be, and has not been, filed with the Commodity Futures Trading Commission ("CFTC"). The CFTC does not pass upon the adequacy or accuracy of this commodity trading advisor disclosure. Consequently, the CFTC has not reviewed or approved this case study.

 

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