Managing Business in Times of Volatile Commodity Prices

Managing Business in Times of Volatile Commodity Prices Anja Strothkämper, Vice President LoB Solutions for Commodity Management, Mannheim, September 12 th 2012

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Motivation

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 Increasing focus on risk management Increased focus on risk management by crisisshaken executives, driven by the need to protect earnings and keep company operations running 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 Oil Mining Agriculture Industry examples Chemicals Metals Mill products Oil and gas (refining) Utilities Industry examples Automotive Consumer products High tech Aerospace Industrial machinery and components Defense and security; public administration Travel and logistics 2012 SAP AG. All rights reserved. 7

Impact of Price Volatility for a Metal Smelter Un-hedged: High Risk Exposure Buy raw material containing copper Sell refined copper 2 Month processing time Loss by copper price fluctuation Revenue from Processing fee Negative overall contribution margin Example for a typical metal company: 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 (= 7,300 9,000 + 400 ) Total loss of 62 Mio USD for the month 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 Processing fee Profit from Futures Derivatives Example for a typical metal company: Gain of 400 USD / TO Cu processed Total gain of 19 Mio USD for the month Sell copper Future 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 Forward curve ( Realistic as of today ) 4 Revenue @ risk Cost & deductions Backwardation ( pessimistic ) History Today Future 1 Copper Grade A LME Official Price Curve in US$/t Cash Buyer 1 Sign Physical Sales Contract (Del. + Pricing in 6 Months) 2 Evaluate Risk 3 Purchase Commodity Future (Sell in 6 Months 7600 $) 4 pessimistic scenario becomes reality. Revenue by future pays off loss/lost profit for physical deal 2012 SAP AG. All rights reserved. 10

Impact of Price Volatility for a Mining Company How do I even increase my planned profit? Where will the market be in the future? What will my revenue & profit look like? 3 Increase Profit Know & monitor the market use competitive advantage & insight Potential gain for floating 2 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 History Today Future Copper Grade A LME Official Price Curve in US$/t Cash Buyer 1 Cost & deductions Sign Physical Sales Contract (Del. + Pricing in 6 Months) 2 Evaluate Market, MtM, Risk & potential 3 4 1 Purchase Commodity Swap fix to float (now risk exists) Potential loss for floating 4 Backwardation ( pessimistic ): Convert Physical Deals Floating to Fix (Swaps) Move QP to start as early as possible (3MAMA -> 1MAMA) Minimize Risk through Futures/Options optimistic scenario becomes reality. Additional Revenue by swap 2012 SAP AG. All rights reserved. 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 business building blocks Analytics Quality mgt. Commodity trading Commodity purchase process Warehousing Transportation Manufacturing Commodity sales process 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 Commodity management specifics Global Trade Management (GTM) Materials management (MM) Commodity pricing and invoicing (CPE) Commodity management specifics Sales and distribution (SD) SAP Treasury and Risk Management application Accounting (financials and controlling: FI/CO) Quality management Production planning Supply chain management Transportation management Global trade services More 2012 SAP AG. All rights reserved. 16

Commodity management solutions from SAP streamline processes across procurement, sales, risk management and accounting departments Finance Commodity sales and procurement Commodity risk management Accounting Procurement, sales, and logistics Forecast Contract with commodity pricing Order Credit management Risk management Compliance and risk reporting Define risk policy Define risk profile Risk review Transportation and delivery Exposure management Commodity risk reporting Hedge management Paper trades MTM: paper, physicals. and inventory Hedge effectiveness and accounting Settlements and accounting Provisional invoice Differential invoice Deal settlement Accounts receivable and payable General ledger 2012 SAP AG. All rights reserved. 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 Process Enablement Commodity Sales Contract to Cash, Materials Management, Finance Outbound Logistics Bulk Transportation Scheduling & Execution, Quality Management Supply Chain Planning S&OP, Demand Planning, Supply Planning, Supply Network optimization Commodity Risk Management Commodity Risk Analysis, Commodity Risk Management, Commodity Trading, Commodity Paper Trades Value Single view on revenue across BU s Better control on contract performance, i.e. DSO Improved shipment schedule, reduced freight costs, i.e. demurrage Seamless integration in contract to cash Visibility on scheduled transports and stock in transit Visibility on global customer demand Reduced supply chain costs Optimal inventories across the network Increased service levels 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 Sales Contract/ Order One-time definition Define quotation sources Average both quotation values and currency conversion values over Quotational Periods Quality based pricing on multiple minerals/metals content Upload quotations from multiple sources (LME, Reuters or other reference prices) Agreed estimated quality with bonus and penalty definition & calculation rules Treatment charges Rebates & Discounts Commodity Price calculation $ 1 st Assay Final Assay Goods Issue Provisional Invoice Differential Invoice Final Invoice 2012 SAP AG. All rights reserved. 21

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 Logistics dence and integration to accounting 2012 SAP AG. All rights reserved. 23

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 Native Commodity Risk Management Increased transparency across multiple and diverse business units Key Performance Indicators (KPIs) measured and managed Accounting Integration Increase compliance by reducing complex, error-prone, and difficult-to-audit solutions High degree of automation Lower TCO (IT) 2012 SAP AG. All rights reserved. 24

Roadmap

Overview of SAP road map for Commodity management Commodity Risk Management Commodity Procurement Commodity Sales Enhanced Commodity Risk Management Enhanced Commodity Procurement Enhanced Commodity Sales SAP HANA SRM* GRC** Procurement Credit management Treasury Sales 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 SAP Rapid Deployment Solutions (RDS) Service Software Enablement Content 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 Q3 2012* Q1 2013* RDS Commodity Risk Management * Planned dates only RDS Commodity Risk Analytics (powered by SAP HANA) RDS Commodity Procurement 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 anja.strothkaemper@sap.com

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