CRU Case Study: Hedging “fashion” in the aluminium industry

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Hedging strategy reviews don’t tend to happen as often or as periodically as asset portfolio or marketing strategy reviews. They are rarely mandated to happen within a certain period and they are certainly not undertaken lightly, since any major changes to ongoing hedging practices inevitably have major consequences on the company’s way of doing business. Sometimes, the company’s size, business model and profile changes substantially over time, either through expansion of its activities or through M&A, prompting a necessary review of its risk management practices. Most often, however, the review is prompted by events that are common to multiple market participants, either “alarm bells” or outright “panics”.

Outlier spreads are one example of a persuasive alarm bell. In copper, 2022 brought about a steep backwardation, which briefly sowed panic in the markets. With cash prices breaking records, it was not altogether surprising, but costly margin calls made much of the market take note.