Identify the Commodity Risk That Rio Tinto Group Is Exposed to and How the Group Is Managing That Risk

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As mentioned above, both natural hedge and financial hedge has drawbacks to a certain extent. On this basis, operational hedge can be considered as an alternative strategy for RTG to improve the future risk management. This essay provides two specific operational hedge methods. Firstly, for many firms, storage is a way of managing risk (CPA Australia 2012). In times when increased production of metals leads to reduce selling price, RTG may store some produces until a more favourable price can be obtained. However, RTG need to understand the costs associated with storage such as equipment and labour costs. Besides, RTG can pass and share commodity risk with suppliers and customers by inserting escalator clauses in the contract. An escalator clause allows changes in price when a factor such as decrease in commodity prices affects the product’s value (BOYABATLI and Toktay 2004). However, Choi and Powers (2002) argued that operational hedge is less important for commodity based firms that face price rather than quantity uncertainty. Overall, this essay has identified the commodity risk that RTG is exposed to and how the company is managing this risk by natural and financial hedging strategies. Besides, this essay not only explains how these risk management strategies work, but also indicates the potential problems associated with each strategy. Although operational hedging strategy can be considered as an alternative method, the most effective way for RTG to manage its commodity risk is to develop a portfolio approach utilizing the combination of the natural hedge, financial hedge and operational hedge strategies.

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References:

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