Manage your exposure to volatile and rising prices for natural gases and other utilities.

by Mike Corley

In energy intensive industries such as aggregates, high and/or volatile natural gas prices can wreak havoc on the bottom line, not to mention the headaches incurred by management and shareholders.

While many companies in the aggregates business don’t consume as much natural gas as diesel fuel or electricity, most do burn enough gas that volatile prices and high expenditures can, and often do, have a significant impact on the company’s financials. If these volatile costs aren’t actively managed, they can lead a company to exceed budget forecasts, or worse, lower or non-existent profit margins.

Although there are many factors that affect natural gas prices, weather, natural gas storage inventories, and economics conditions, as well as the market’s perception of these factors, are the primary factors that drive natural gas prices.

Most large energy consuming companies such as those in the aggregates industry can mitigate their exposure to volatile and potentially rising natural gas costs, as well as diesel fuel and electricity costs, through hedging. Hedging allows market participants, such as aggregate producers which consume large quantities of natural gas and other energy commodities, to lock in prices and margins in advance, while reducing the potential impact of volatile and rising natural gas prices.

The primary reason that many large, natural gas-consuming companies hedge their natural gas costs is that the fluctuating price of gas can present large financial risks that have a significant impact on the bottom line. Another reason for hedging a company’s exposure to natural gas price risk is to improve or maintain the competitiveness of the firm. Very few companies are not subject to competition; they compete with other domestic companies in their sector as well as with companies located in other countries that produce similar goods for sale in the global marketplace. As a result, by having the ability to know and/or manage their future natural gas costs, many companies can establish a competitive advantage in their market.

Shifting the risk