Sep 24, 2020 | Foreign Exchange

The Energy Sector – managing currency risk for complex supply chains

The energy market has seen significant fluctuations over the last few years as supply and demand have changed rapidly. Meanwhile, the challenges of sustainability and renewables remain an ongoing discussion. With the industry changing so rapidly, it is more important than ever that businesses keep up to date on the latest trends and reports.

According to the Energy Trends June 2020 produced by Department for Business, Energy & Industrial Strategy, total energy production was 1.8 per cent higher in the first quarter of 2020 compared to that of 2019, with rises in gas, bioenergy and waste, wind, solar and hydro, whilst also experiencing an offset with falls in coal, oil and nuclear output.

energy wind

The challenges of a fast-growing sector
As the energy sector evolves and expands over the next few years, individual companies will find their supply chains becoming increasingly complex.

Whether working in conventional energy production, or renewable areas such as subsea and offshore technology, pipeline and trenching services, or wind capabilities, there is a need to source products and materials from suppliers all over the globe. Add to this the sheer scale of some operations, and the need for compliance with strict environmental, health and safety regulations, and you have a set of demanding operating conditions. The last thing on anyone’s mind might be the challenges that come with fragmented cross-border supply chains.
The impact of the supply chain
Efficiency in the materials supply chain can have a dramatic impact on a company’s bottom line, by increasing productivity, reducing risk and mitigating downtime. It is also important that the supply chain is consistent, enabling demand planning and forecast accuracy. One factor that can easily be overlooked is the potential impact of currency risk on the bottom line.

Whether making or receiving payments, foreign exchange should never be an afterthought. It should be budgeted for as part of any negotiation. Agreed prices and calculated profits can be significantly impacted if the exchange rate moves unfavourably on the day a payment is being made or received. And the more complex the supply chain, the more the risk increases. From companies operating multi-currency treasuries to those dealing simply in dollars or euros, the best way to mitigate currency risk is to have a hedging strategy.
What is hedging?
Hedging simply means protecting your business against movements in exchange rates. However much they fluctuate, you can fix your transactions in advance, so you know what your costs, cashflows and profits will be, putting you in better control of your bottom line.

This way, your cashflow can be stable, your business forecasts can be reliable and your profits can be better protected. By setting a hedging strategy you no longer have to react to the market; you can be control at all times. So you can focus on your business without unnecessary distractions.

‘At Western Union Business Services, we work with several businesses in the energy sector’ says David Prendeville, Director of UK FX Services at Western Union Business Solutions. ‘They all want to help protect their bottom line from currency risk, but each one is unique and they all have very different priorities, transaction volumes and business goals. There is no ‘one size fits all’ when it comes to setting a hedging strategy, which is why we work closely with each of them to understand their needs and give them informed, practical help and support.’
Taking control amid uncertainty
There is a huge shift underway in the competitive landscape of the worldwide energy sector as new players from producing countries and the high-growth developing markets of China and India join the industry’s top ranks. At the same time, environmental responsibility is at the top of many agendas and is continuously evolving. In short, there are many external forces at play which can’t be controlled. Currency risk doesn’t have to be one of them. With planning and forethought, it can be the one part of the balance sheet not subject to unexpected impacts. It is one area where you really can take control.