Commodity

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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
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The information in this presentation is confidential and proprietary to SAP and may not be disclosed
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© 2012 SAP AG. All rights reserved.
2
Agenda
Motivation for Commodity Management
SAP Solution Approach
SAP Solution Offering
Roadmap
Summary
© 2012 SAP AG. All rights reserved.
3
Motivation
Global trends and their impact on commodity management
Volatility fueled by market dynamics
Increasing focus on risk management
Increasing demand in emerging markets (China
and India) is creating a tight balance between
supply and demand
 Increased focus on risk management by crisisshaken executives, driven by the need to
protect earnings and keep company operations
running
 Geopolitical uncertainties
 Rising influence of hedge funds and financial
institutions
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.
5
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
Source: Commerzbank /Wirtschaftswoche – Commodity radar screen for March 2012
© 2012 SAP AG. All rights reserved.
6
Commodity management industries
Commodity producers
Commodity converters
Commodity consumers
Industry examples
Industry examples
Industry examples
 Oil
 Mining
 Agriculture










© 2012 SAP AG. All rights reserved.
Chemicals
Metals
Mill products
Oil and gas (refining)
Utilities
Automotive
Consumer products
High tech
Aerospace
Industrial machinery and
components
 Defense and security; public
administration
 Travel and logistics
7
Impact of Price Volatility for a Metal Smelter
Un-hedged: High Risk Exposure
Buy raw material
containing copper
Sell refined
copper
Example for a typical metal company:
2 Month
processing time
Loss by
copper
price
fluctuation
Revenue
from
Processing
fee
Negative
overall
contribution
margin
August raw material purchase:
95%
Purchase Price:
(monthly avg August)
October refined material sale:
Sales Price:
(monthly avg October)
Processing Fee:
50,000 TO Cu, payable
9,000 USD/TO Cu
47,500 TO Cu
7,300 USD/TO Cu
400 USD/TO Cu

Loss of 1,300 USD / TO Cu processed

Total loss of 62 Mio USD for the month
(= 7,300 – 9,000 + 400 )
Copper Grade A – London Metal Exchange (LME)
Official Price Curve in US$/t – Cash Buyer
© 2012 SAP AG. All rights reserved.
8
Impact of Price Volatility for a Metal Smelter
Hedged: No/Low Risk and ensured profitability
Buy raw material
containing copper
Sell refined
copper
2 Month
processing time
Loss by
copper
price
fluctuation
Sell copper
Future
Example for a typical metal company:
Processing
fee

Gain of 400 USD / TO Cu processed

Total gain of 19 Mio USD for the month
Profit from
Futures
Derivatives
Buy copper
Future
Copper Grade A – London Metal Exchange (LME)
Official Price Curve in US$/t – Cash Buyer
© 2012 SAP AG. All rights reserved.
9
Impact of Price Volatility for a Mining Company
How do I secure my planned profit?
Where will the market be in the future?
What will my revenue & profit look like?
Contango (“optimistic”)
3
2
4
Forward curve (“Realistic
as of today”)
Revenue @ risk
Backwardation (“pessimistic”)
Cost & deductions
1
History
Copper Grade A – LME
Official Price Curve in US$/t
– Cash Buyer
Today
2
1
© 2012 SAP AG. All rights reserved.
Sign Physical Sales
Contract (Del. +
Pricing in 6 Months)
Future
3
Evaluate Risk
4
Purchase Commodity
Future (Sell in 6 Months
7600 $)
“pessimistic” scenario becomes
reality. Revenue by future pays off
“loss/lost profit” for physical deal
10
Impact of Price Volatility for a Mining Company
How do I even increase my planned profit?
Increase Profit –
Know & monitor the market – use
competitive advantage & insight
Where will the market be in the future?
What will my revenue & profit look like?
Potential gain for
floating
3
2
4
Potential loss for
floating
Cost & deductions
1
History
Copper Grade A – LME
Official Price Curve in US$/t
– Cash Buyer
Today
2
1
© 2012 SAP AG. All rights reserved.
Sign Physical Sales
Contract (Del. +
Pricing in 6 Months)
Future
3
Evaluate
Market, MtM,
Risk & potential
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…
4
Purchase Commodity
Swap fix to float (now
risk exists)
“optimistic” scenario becomes
reality. Additional Revenue by
swap
11
SAP Solution Approach
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.
13
Commodity management solutions from SAP
© 2012 SAP AG. All rights reserved.
14
Commodity management – business building blocks
Analytics
Quality mgt.
Commodity
purchase process
Commodity
trading
Warehousing
Transportation
Commodity
sales process
Manufacturing
Commodity risk management
Accounting
© 2012 SAP AG. All rights reserved.
15
Commodity management – our solution platform
SAP BusinessObjects portfolio
Commodity
management
specifics
Commodity management specifics
Global
Trade
Management
(GTM)
Materials
management (MM)
Commodity management specifics
Commodity
pricing and
invoicing
(CPE)
Sales and
distribution (SD)
Commodity management specifics
SAP Treasury and Risk Management application
Accounting (financials and controlling: FI/CO)
Quality
management
© 2012 SAP AG. All rights reserved.
Production
planning
Supply chain
management
Transportation
management
Global trade
services
More
16
Commodity management solutions from SAP streamline processes across
procurement, sales, risk management and accounting departments
Commodity
sales and
procurement
Finance
Forecast
Procurement, sales,
and logistics
Risk
management
Define risk
policy
Contract
with
commodity
pricing
Transportation
and delivery
Order
Exposure
management
Commodity risk
management
Accounting
Credit
management
Commodity
risk
reporting
Paper
trades
MTM: paper,
physicals. and
inventory
Define risk
profile
Compliance and
risk reporting
Settlements and
accounting
© 2012 SAP AG. All rights reserved.
Risk
review
Hedge
effectiveness
and
accounting
Hedge
management
Provisional
invoice
Differential
invoice
Deal
settlement
Accounts
receivable
and payable
General
ledger
17
A Journey to Maturity for our customers
Many of our customers have deployed our solutions in a sequenced approach and
increased productivity and competitive advantage over time
Commodity Risk
Management
Supply Chain
Planning
Outbound Logistics
Commodity Sales
Process
Enablement
Value
Contract to Cash,
Materials Management,
Finance
• Single view on revenue
across BU’s
• Better control on
contract performance,
i.e. DSO
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
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
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
Time, Value & Competitive Advantage
© 2012 SAP AG. All rights reserved.
18
SAP Solution Offering
SAP Commodity Procurement and Commodity Sales
End to End Process supported
Capture
contract
Create calloff
Transport
and delivery
Provisional
invoice
Update
quality or
price
Differential
invoice
Contracts
Integrated
Full
Provisional
Update quality
Differential
with flexible
with Treasury
integration in
invoicing
characteristics
invoice based
pricing rules,
SAP
based on
and prices
on updated
incl. index-
Business
preliminary
information
based prices
Suite
information
and integration
to accounting
© 2012 SAP AG. All rights reserved.
20
Commodity Pricing within a typical
Commodity Sales / Commodity Procurement process
 Define quotation sources
Sales
Contract/
Order
One-time definition
 Upload quotations from
multiple sources (LME, Reuters
or other reference prices)
 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
Commodity Price
calculation $
Goods
Issue
© 2012 SAP AG. All rights reserved.
Provisional
Invoice
1st Assay
Differential
Invoice
Final Assay
Final
Invoice
21
SAP Business Objects Xcelsius Dashboard for Commodity Sales
Non interactive screenshot
© 2012 SAP AG. All rights reserved.
22
SAP Commodity Risk Management
End to End Process supported
Managing
physical risk
exposure
Assessing risk
Executing
hedging
strategy
Deal
administration
Accounting
and settlement
Hedge
accounting
Integrated
Up-to-date
Full Suite of
Deal entry,
Instrument
Fully supports
with Physical
Risk
Commodity
validation,
lifecycle
Hedge
Business /
Reporting
Instruments
correspon-
management
accounting
dence
and integration
Logistics
to accounting
© 2012 SAP AG. All rights reserved.
23
Value proposition for integrated
SAP Commodity Risk Management
SAP provides comprehensive end to end
processes for commodity risk management
Accounting
Integration
Logistics Integration
•
Enables timely and
efficient hedging
decisions
Increase compliance
by reducing complex,
error-prone, and
difficult-to-audit
solutions
•
High degree of
automation
Lower TCO (IT)
•
Lower TCO (IT)
•
Reliability and
timeliness of data, e.g.
in position report
•
•
Native Commodity Risk Management
© 2012 SAP AG. All rights reserved.
•
Increased transparency across multiple and diverse business units
•
Key Performance Indicators (KPIs) measured and managed
24
Roadmap
Overview of SAP road map for Commodity management
Procurement
Commodity Risk Management
Enhanced Commodity Risk
Management
Commodity Procurement
Enhanced Commodity
Procurement
SAP
HANA
Treasury
SRM*
Sales
GRC**
Commodity Sales
Enhanced Commodity Sales
Credit management
Solution today
Planned innovations
Future direction
*Supplier relationship management
** Governance, risk, and compliance
© 2012 SAP AG. All rights reserved.
26
Rapid Deployment Solutions for Commodity Management
Planned Innovations
Software
SAP Rapid Deployment Solutions
(RDS)
Quickly address the most urgent business
processes
Content
SAP best practices, templates and tools make
solution adoption easier
Software
Service
Enablement
Content
Guides and educational material speed end user
adoption
Enablement
Service
Fixed scope and price provides maximum
predictability and lowers risk
Q3
2012*
Q1
2013*
RDS Commodity
Risk Management
RDS Commodity
Risk Analytics
RDS Commodity
Procurement
(powered by SAP
HANA)
* Planned dates only
© 2012 SAP AG. All rights reserved.
27
Summary
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
© 2012 SAP AG. All rights reserved.
29
Thank You!
Contact information:
Anja Strothkaemper
Vice President
Commodity Management
LoB Corporate Functions
SAP AG
T +49 6227 7-64398
M +49 160 88 96 587
[email protected]
© 2012 SAP AG. All rights reserved.
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