Another question to consider is how easily a company can pass the fluctuating costs along, says Tim Statts, vice president for risk management at Summit. It may be relatively easy to link the price of building materials, say, to the cost of producing them. Owens Corning, a maker of building materials, raises the price it charges consumers for asphalt when the cost of crude petroleum goes up. But it’s harder for a consumer products company to vary the price of a product like toothpaste.
Yet even Owens Corning, where energy accounts for 10 to 11 percent of annual costs, wants to smooth out the price fluctuations by hedging. Dave Andres, the company’s global leader for energy and precious metals, doesn’t try to time the markets in hopes of keeping energy costs to a bare minimum. Instead, he regularly signs contracts to buy a percentage of the company’s energy at fixed prices. That may mean paying too much sometimes and saving a lot at other times, but it cuts the variation in what he pays roughly in half, he says. Most of Owens Cornings’s energy comes from natural gas, and the company keeps an eye on crude oil as well. It is also considering strategies for hedging diesel, which is a big part of most large manufacturers’ transportation costs.
Andres points out that for all the benefits of hedging, the company’s main approach to reducing its risk is an effort to cut its energy use by 25 percent. “Our view,” he says, “is that the best hedge is that kilowatt you don’t use.”
Neil Savage (www.neilsavage.com) is a freelance writer based in Lowell, Massachusetts. He has written for IEEE Spectrum, Discover, and Nature Photonics.