Nestlé is considering using derivatives to hedge its global energy exposure. The Swiss giant has exposure to electricity, fuel and oil on many levels, such as transportation, manufacturing and overhead costs. Nestlé officials would not comment, but an analyst estimated Nestlé's energy exposure is just below EUR2 billion (USD2.44 billion). In the last nine months the corporate has been looking closely at how it can accurately hedge energy exposure, in a move away from its current strategy of fixing prices with suppliers on an annual basis.
Philippe Blondiaux, group treasurer in Zurich, said, "We have tried to brainstorm on a global concept." The results of nine months of research, however, showed that there is less correlation between energy markets globally than Blondiaux had expected. He also noted that some energy markets Nestlé investigated did not have liquid enough derivatives to hedge its exposure. "We are used to managing volatility, but we are reluctant to enter illiquid markets," he added.
The group is reviewing the possible use of derivatives including swaps, forwards and futures and is discussing various possibilities with several banks, said Blondiaux. Nestlé is putting systems in place and considering how best to handle the global operation. He explained that regional purchasing groups already hedge exposure to commodities, such as sugar and cocoa, and he would not rule out the possibility of fuel and electricity hedging being carried out regionally, rather than from the central treasury in Zurich. The purchasing group could not be contacted by press time.
Energy traders say they have noticed a rise in the number of non-power company corporates entering the energy markets. "Management's attention has been caught by rising oil prices in recent months," said Steve Jones, executive director in commodities at Morgan Stanley in London. Gavin Tait, senior energy trader at ABN AMRO in London, added, "The level of sophistication [of corporates] is definitely on the up." Bankers, however, noted that the notional sizes corporates execute are normally too small to move the markets.
The power exchanges are also supporting this growth by bringing new instruments to the market. UKPX, the London-based power exchange launched a new forward contract two weeks ago. The International Petroleum Exchange also has plans to launch two electricity futures contracts.
