Companies hedge on ATF to tackle price volatility

In a move to curb costs and with oil prices on a decline, oil companies like Tata Petrodyne Ltd have got into hedging of crude oil on the domestic trading platform -- multi commodities xchange.

In addition to that, an increasing number of airlines like SpiceJet, national carrier Air India and GoAir are either getting into hedging of aviation turbine fuel or increasing the quantum of ATF hedged on the MCX.

"We are active on the MCX and hedging activity has paid off pretty well for us," said an official from Tata Petrodyne. The company is a significant player in the exploration and production of crude oil and natural gas.

Last month, state-run Indian Oil Corporation approached MCX to provide it with a platform to hedge its refinery margins and end products from crude oil.

In a trading activity, when an organisation hedges its portfolio, it is primarily taking positions in the future market and operating within a pre-defined band of possible loss or gain.

On the one hand, this feature could help the company achieve certainty of future cash flows. On the other hand, it could also eliminate the possibility of gaining from any favourable market movements.

While the volumes of how much Tata Petrodyne hedges are not known, sources say the company began hedging on MCX when crude was around $122 per barrel.

Today, the crude is around $45 per barrel.

"The company would have benefited well from the fall in crude prices. If an exploration and production company enters into a long-term supply contract with a buyer to sell crude at $80 per barrel, it would not be able to benefit if the crude prices increase beyond $80 per barrel," said a Mumbai-based analyst.

Among airline companies, SpiceJet is now planning to hedge a larger chunk of its aviation fuel consumption.

"We are currently hedging around 5 per cent of our consumption but it could up to above 25 per cent and much more," said a company executive.

According to sources, national carrier Air India and Mumbai-based low-cost carrier GoAir have firm plans to hedge aviation fuel on the MCX.

"There are internal talks going on in this matter and we are definitely looking at it. But no firm decision has been taken yet," said an Air India spokesperson.

According to sources in National Aviation Company of India Ltd, which owns Air India, the board had approved hedging of as much as 20 per cent of their aviation fuel consumption last year.

GoAir executives were not available for comment but sources in MCX confirmed that they were also mulling the hedging of jet fuel on the domestic platform.

Hedging of aviation fuel on the MCX was allowed in April last year.

However, airlines are only allowed to buy aviation fuel on MCX and not sell the product on the exchange.

Industry experts said that hedging jet fuel at this point in time might give them benefits since prices are down by more than 48 per cent since August this year.

However, experts also say that given the volatility in prices the carriers might want to wait and watch since the prices might go down further, at least in the coming two months.

Aviation fuel, which has a 95 per cent correlation with crude oil, accounts for about 40 per cent of an airline's cost.