2. About MERIT
MERIT provides tailor-made commodity management services:
services
Analysis & monitoring of commodity exposure – effective risk control
Defining commodity hedging strategies – budget balance
Realizing commodity trading strategies – stabilisation of company
earnings
MERIT was founded in Vienna in 1988 as an independent commodity
specialist company by visionary Dr. Michael Zillner,
who is still the CEO today
MERIT’s methodology is based on a robust +20-year business
experience with industrial companies in Germany and Austria Dr. Michael Zillner
Founder & CEO of MERIT
Group
2 Vienna, March 2010
3. MERIT‘s Convictions
MERIT is strongly convinced that commodity management is now-more-than-ever
strategically important for industrial companies as a real value driver to
strengthen company earnings and competitiveness:
120
Many companies are confronted with price risks 115
without taking adequate measures
110
105
Commodity buyers lack the tools -based on
100
95
independent price information and accurate 90
forecasting methods- for effective control of their 85
80
exposure to fluctuations and increases in raw 75
Aluminium
Lead
Copper
Nickel
material prices 70
1/4/2010
Tin Zinc
1/18/2010 2/1/2010 2/15/2010 3/1/2010
YTD Price-evolution, Source: MERIT
Although good negotiation skills of purchasing departments remain important, the
importance of commodity risk management and timing is essential to ensure
relative stability and predictability of company earnings
3 Vienna, March 2010
4. MERIT‘s Approach
As a human business MERIT emphasises a client-needs-driven approach
In-house trained specialists team-up with clients
Aiming for long-term partnership based on mutual trust
MERIT offers services developed under one roof:
roof
Consultancy
Exposure Management
Execution Services
Physical Trading though dedicated wholly-owned group company
Inventory / Storage Financing
4 Vienna, March 2010
5. MERIT‘s Core Services (1/2)
Consultants
Identification, analysis and quantification of price risks (commodity and
financial)
Developement and optimisation of a customized Management Information
System (MIS) for continous quantification and controll of all relevant
price risks
Definition of hedging strategies
Daily reporting, customized value- and risk presentation
Risk- and Exposure Management
Data capture, analysis and active management of market price risks
Outsourcing with clearly defined links to client‘s risk department
Optimisation of the result with best possible product mix
Exposure Management using quantitative tools to improve overall results
5 Vienna, March 2010
6. MERIT‘s Core Services (2/2)
Execution Services
Execution of Hedging Strategies via 24h Brokerage Desk*
Implementation of appropriate account setup
Signaler function
Physical Trading
Physical trading and delivery capabilities
Inventory / Storage Financing
*Execution in cooperation with group company Merit Alternative Investments GmbH (FMA authorised)
6 Vienna, March 2010
7. Related Services
MERIT Stock Control MERIT Strategy Development
Elimination of the stock price risk Strategic support for company boards with regard to
financial risks
MERIT Order Management
Securing income Active Risk Management
Taking into account the respective purchasing, sales
MERIT Procurement Management and stock situations
Control of the purchase price risk
Scenario Simulation and Evaluation
MERIT Exposure Management Using our standard software suite RIVa
Overall risk assessment of a company
MERIT Overlay Management
MERIT Budget Management Stabilisation of financial results through targeted
Assistance in keeping to budget targets overlay management of a company’s financial risks
Reconciliation of group-wide financial risks MERIT Value Management
(Currency, interest and raw materials risks) Results optimisation within pre-defined risk thresholds
taking correlation and price elasticity into account
Derivation and Modelling of Hedging
Direct market access to relevant Measures
exchanges in accounting systems (IAS 39 – hedge accounting)
Through the MERIT-Group, with direct exploitation of
market opportunities to optimise purchasing results Group Reporting – Risk Report
Assistance in compiling the risk report for annual
MERIT Cash Flow Management reports
Safeguarding cash flows from raw materials risks
7 Vienna, March 2010
8. Core Industry Expertise
Automobile producers High Energy consuming industries
Suppliers to automobile industry Steel Industrie
Airlines and other transportation Energy providers / public sector
businesses related
Metal processors Paper and pulp
Other commodity processing
Utilities
industries
8 Vienna, March 2010
9. Markets we cover
Non-ferrous and precious metals Energy
Copper, aluminium, zinc, nickel, tin, gas oil, crude oil, natural gas, coal,
lead, magnesium kerosene
Gold, silver, palladium, platinum, Electricity, CO2
rhodium
Steel and steel derivatives Plastics
Long steel, flat-rolled steel, high- PP, PE, PA6, PA6.6, ABS, PC/ABS
grade steel types, tubes,…
Iron ore
Soft commodities Pulp
Corn, wheat, soybeans, sugar, cocoa
and coffee beans, cotton, palm oil
Customer-specific special materials and alloys
9 Vienna, March 2010
10. MERIT – Tools MERIT Risk Matrix - Example
Our teams use internally developped tools
such as:
MERIT Risk Matrix
MERIT Sensitivity Analysis
MERIT Sensitivity Analysis - Example
MERIT Chart – Parameter Analysis
Academically relevant evaluation models
such as Value at Risk are actively used:
MERIT VAR - Example MERIT Chart – Example (Gas)
10 Vienna, March 2010
11. Critical Client Challenges
The budgeting process
Huge divergence between planning and operational processing / fluctuating
prices of raw materials / lack of transparent profit centre calculations
Difficulties with the order calculation process
Price variation while preparing/processing the order / contribution margin can
not be estimated/foreseen / sales pressure on costs through large corporations
Stock & inventory valuation
Changes in prices between purchase and processing / build-up of risk positions
and hidden risks / working capital costs
Difficulties stating earnings
Dependency on international markets / uncertainty due to external factors /
imprecise reporting / unpredictable cashflows
11 Vienna, March 2010
12. How MERIT turns Challenges into Opportunities (1/3)
Securing price levels to achieve competitive advantages
The prices of nearly all important commodities markets have recovered from their historical lows and
rallied considerably since the beginning of the year. The first signs of recovery in the world economy
are visible. The peaks in prices of last year presented huge problems for many manufacturers and
energy-intensive companies. In the medium term there is an opportunity to secure raw materials
prices and purchasing budgets with some room to the downside. By using standardized options and
futures contracts one can profit from short-term setbacks and hedge against a new rise in prices.
Presentation of the risk factors to investors and lenders of capital
The tightened regulatory capital requirements for financial institutions under Basel II and the shortage
of capital for the banks caused by the financial crisis will make company financing much more difficult
in the future. As a result, a good credit rating and a strong investor relationship will be ever more
important. In addition to the general economic and market factors, company key performance figures
(KPIs) as well as controlling and management functions will become increasingly important.
12 Vienna, March 2010
13. How MERIT turns Challenges into Opportunities (2/3)
Securing and improving the earnings position
Companies should be able to concentrate on what they’re best at – producing innovative products and
selling them at competitive prices. Supply side situation and competitive product price calculation are
very important. Exogenous variables such as raw materials prices can be actively managed using
standardised finance instruments – use of such instruments leads to a stabilisation in the earnings
position and, over and above this, frequently to an improvement in earnings themselves.
Implementation calls for expertise based on experience, which is often not sufficiently available in
many organisations.
Efficient corporate management
Due to the growing complexity of financial products and the increasing volatility of the financial and
commodities markets senior executives are confronted with increasing expectations to risk
management. Planning is made increasingly more difficult as a result of rising or falling raw materials
prices - and the efficient use of financial products for risk management is hampered because of a lack
of modelling systems.
13 Vienna, March 2010
14. How MERIT turns Challenges into Opportunities (3/3)
Reduction in the cost of purchased materials
Due to the increasing volatility of raw materials prices planning of raw materials-based purchasing
costs is difficult. These can be partly compensated by medium to long-term supply contracts, which
then leads to increased sales price risk, however.
Evidence of raw materials risks
Production costs are becoming ever more influenced by raw materials prices. The costs not only of
primary products but also of consumables and energy have to be taken into account here too. Pushing
procurement risks and management thereof onto suppliers is an insufficient solution to the problem.
The problems that suppliers in a variety of sectors have recently been experiencing have shown that
those businesses that are actually more at the end of the supply chain are indirectly affected by the
risks.
14 Vienna, March 2010
15. In Conclusion: Your Benefits of Partnering with MERIT
Strengthening your business:
Risk control – knowing the impacting risks and preparing for appropriate action
Budget balance - independent price information and accurate forecasting
improve planning & cost efficiency
Stabilization of company earnings – improving your bottom line
RISK
DEFINITION OF RISK Added Value
Fragility IDENTIFICATION
MANAGEMENT EXPOSURE CONTROL
STRATEGIE
Tailor-made commodity management services based on a robust 20-year
experience
15 Vienna, March 2010
17. Reference Projects (1/2)
Client Year Description/aim of project
Provision of consultancy on how to approach fixed pricing for
Central European customers. Its suppliers having changed the basis for their supply
manufacturer of alloy rims 2008 contracts, our client was faced with the problem of variable prices for
purchasing but supplying to its customers at prices fixed for years in
advance.
New energy purchasing concept for the main operation in Austria and
Multinational
2008 thereafter for its subsidiaries in the UK/US. Optimisation of electricity
conglomerate supply and development of a strategy for pulp purchasing.
Hedging of stock values and recalibration of the trading risk through
capping overall exposure. Introduction or regular risk reporting to allow
Large European
2008 timely control of the relevant risk factors. As a result, the company can
metal trader deal with price fluctuations in non-ferrous metals markets in a
controlled way.
Development of a strategy to reconcile the risks at each location.
Definition of a product catalogue to handle the Group’s existing nickel,
Cable manufacturer based
2008 plastic and currency exposures. The positive operating result is
in CEE therefore assured, even if there are sharp declines in the raw materials
markets.
17 Vienna, March 2010
18. Reference Projects (2/2)
Client Year Description/aim of project
Cross-hedging analysis of the product portfolio – in particular for long
Important European steel and flat-rolled steel. Creation of a risk profile for the whole group.
2008
steel merchant Hedging solutions by means of different market segments (cross, LME,
OTC…)
Data collection and analysis of the overall exposure on raw materials.
German Development of measures to demarcate value-added/raw materials
2009
car manufacturer components in purchasing. Development and deployment of strategic
overlay management.
Analysis and evaluation of the existing fuel supply contracts.
German Development of planning and analysis tools to aid optimal fuel stocks.
2009
airline Establishment of a Group-wide hedging strategy and supervision of its
implementation with core banks.
18 Vienna, March 2010
