Does GM Hedge?

Why hasn’t GM ever hedged against Oil/Gasoline price increases?

Or do they, and we just never heard about it?

That question came up several years ago in a late night conversation, but I never followed up on it.  Airlines do it, many Oil companies  do it — so why not GM or Ford? Both companies have become so reliant on big SUVs, pickup trucks, and other energy inefficient vehicles, that they are so obviously subject to the vagaries of the Crude market.

I mentioned this vulnerability to oil’s pricing on Power Lunch about a year ago (Sell GM att $45 turned out to be a pretty good call), and had an interesting discussion with another guest in the green room about it.

But that’s now history, so lets make this propspective:  What other companies’ profits are vitally dependent on a commodity that could see big price increases? Can they hedge against a big move? Should they?

Consider: Intel & Silicon, Utilities and Natural Gas/Coal, Boeing and Aluminum, Coke and Sugar.

Use the comments section to suggest firms that should consider a hedge — but don’t.

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  1. M1EK commented on Feb 13

    How would this help? For your other examples, the commodity serves as a manufacturing input to their actual salable product or service. For GM, the cost of oil is mainly an issue for their _customers_.

    The equivalent analogy would be Intel hedging against the electricity it cost for their customers to run the PCs?

    I can’t see how GM could make something like this work, unless they did one of those “free gas for a year” deals fleet-wide.

  2. Idaho_Spud commented on Feb 13

    In the utility biz, fuel hedging and long-term contracts are pretty routine. In the independent energy sector, hedging is done both on fuel (input) and energy (output)

  3. Abhay commented on Feb 13

    My thoughts are exactly with m1ek. Each company you listed uses the commodity as an input to their production.

    Plus, how would you hedge it? Average miles driven per year times number of cars sold? Perhaps some other sort of formula?

    I think it would be easier to do this on a portfolio level rather than on the macro level.

  4. B commented on Feb 13

    Hedge the hedge funds driving these markets through the roof? The nontraditional players in the futures markets are driving the prices up more than international demand IMO. Why is it that commodities with an active futures market are exploding while those that don’t aren’t? Why didn’t copper or oil go thorugh the roof when China was growing at a faster pace ten years ago? Uh…because the investment money wasn’t flowing through the futures markets as it is now. So, one way I would say we could “hedge” prices is to restrict the futures markets to producers and consumers of that particular product. Whether that be sugar, oil, copper, etc. It worked that way for a long time. That’s my hedge.

    As far as GM, IMO their hedge against rising oil prices should be a product lineup that can compete in the high MPG space and innovation into new technology. We get a pickup that now gets 17MPG with a V8 and forty years ago it got 11MPG. Is that the best we could do after the last OPEC mess in the 70s? The Japanese are laying it on thick right now because they are introducing the Fit, Daihatsu, and other models owned by Honda, Toyota and Nissan. These models are made for the Japanese market where CAFE standards are well over 40MPG. In fact, every major market has CAFE standards at least double ours including the EU, China-who is getting read for much tougher standards-and Japan.

    That said, I could see GM hedging against energy consumption for plants in particular similar to SWA. I would assume their energy bill is many magnitudes larger than SWA’s revenue.

    Frankly, the in computer business, the hedge is more likely a component hedge caused by the cyclicality of the business rather than commodity costs. I’d say why doesn’t IBM, HP and Dell hedge against DRAM and disk drive price spikes that are so common? Heding costs money. So, one would have to actually determine if it is worthwhile. Hey, create a futures market for everything. That way all of the gamblers can find another way to go broke.

  5. Dan Weber commented on Feb 13

    Hedging for oil prices at GM is very logical. If Oil prices are high, their SUVs are going to have more difficulty selling, so they need to hedge the loss at hand.

  6. Michael commented on Feb 13

    Lumber/steel for construction companies

  7. Dan Weber commented on Feb 13

    I’ve been hearing that this might actually be a good year for GM regardless of the bad press they’re getting … a friend of mine who works in the factory in wisconsin where they make most of their suvs says they’re working overtime, and that SUV orders haven’t been this good in a very very long time. All orders being filled right now are already sold and are heading out to the dealerships.

    He noted that this year (2006), they’re getting sales per day that they couldn’t even reach per week last year. Food for thought…

  8. Mark commented on Feb 13

    Their business has no direct link to oil. They don’t rely on oil to succeed. Why should they have to waste time & money hedging oil exposure that they don’t have?

    The Japanese hedged against oil years ago via innovative thinking and new economy vehicles.

    A companies best hedge is good management. PD hedged against rising copper prices, but their management is so incompetent that they left no room to capture rising prices. The solution to GM’s woes is not in hedging out its energy exposure. The solution lies in the innovative thinking that goes on at the HQ and so far they are about 5 years behind the Japanese.

    You want a good hedge? Fire the man in the corner office.

  9. Zach commented on Feb 13

    What GM needed was a hedge for health insurance, which is weird because health insurance is a hedge for health care.

    The problem with GM hedging oil is that increases in the price of oil affect type of car sold as much as number. If GM sold only really fuel efficient cars would it hedge oil on the downside?

    Back to health care, shouldn’t they hedge GM? If GM fails and cuts its health care obligations dramatically won’t that affect many hospitals in GM/Delphi heavy areas?

  10. Josh commented on Feb 13

    What GM really needs to hedge for is increases in health care. Most companies have that need as well, but surprisingly the exchanges have not responded. Oh well, at least we have snowflake futures.

  11. Abhay commented on Feb 13

    Mark,

    Do you *really* think GM and Oil are not correlated? Tell me what will happen to GM sales if Oil is $200 a barrel.

    Just a wild guess that sales will *slightly* decline.

  12. Marc Shivers commented on Feb 13

    I think the real problem, from a macro perspective, is not that GM loses money when gasoline price rise, but that GM (and the economy) has to suffer the dead-weight loss of unutilized manufacturing capacity. Financial gains on gasoline hedges won’t solve that problem. Rather, more flexible manufacturing, along with a product mix that has less overall sensitivity to gasoline prices (hybrids?) is a better solution.

  13. Mark commented on Feb 13

    Making cars does not have any correlation to oil prices. Look at HMC, TM, DCX. They make cars and their stocks have ZERO correlation to the price of oil. Why is that?

    My point is that the GM management could have hedged away this risk long ago with some future looking innovation. Instead, they decided to continue making fuel inefficient vehicles. Now they are suffering for it.

    Yes, their business can be highly dependent on oil if they continue to make gas guzzling SUVs, but is this necessary? Airlines are forced to use oil. Car makers have other options. GM simply chooses not to innovate.

    Blaming GMs woes on oil is a crock. GM’s woes are due solely to incompetent management. The best hedge for autos is innovation. When will GM realize this?

  14. Abhay commented on Feb 13

    Apples and Oranges Mark … you are comparing the price of oil and manufacturing of cars, which I say has some correlation, but may not be very high.

    I am saying that price of oil and sales of cars has to have a pretty high correlation.

  15. Susan commented on Feb 13

    In fact, Ford does maintain a sophisticated, in-house commodity hedging operation. According to the father-in-law of one unit employee, each year the company flies 150 top PhD graduates in math, physics and computer science to Michigan for an intensive competition, culling the weak from the strong through rigorous tests of quantitative and probing interviews. After several days of scrutiny, the “winner-takes-all” bakeoff culminates in a closing dinner, at which several finalists’ envelopes are opened to disclose the winner. Once recognized, he is immediately whisked off to a private room so that the company may secure his commitment to taking the awarded job.

    (Please note that my contact’s son-in-law did not attend a top-tier engineering school. He is, however, a native of the Low Countries. Hence, besides his analytical talents, he proved attractive because of his fluency in English, French and German).

    From this story, it seems as though Ford takes this matter very seriously.

  16. Zach commented on Feb 13

    @Abhay

    Assume everyone in the US owns either an original Hummer or a very old gas guzzler.

    If the price of gas goes to $4 a gallon what effect do you think this will have on the sales of cars?

    I suspect it will increase car sales since many people will want to lower there exposure to the price of gas, even if some of them keep their guzzlers.

    Mark’s point isn’t that GM’s sales won’t be affected by the price of oil, its that car sales aren’t as a whole aren’t. If GM is producing the wrong kind of car then its a management problem not a commodity problem.

    As a follow up to my previous post, what about EDS hedging GM? If GM restructures plum EDS contracts may dissapear, while crappy ones could remain. Anyone who relies on one major client should probably hedge that client.

  17. Mark commented on Feb 13

    Abhay,

    If you believe that “price of oil and sales of cars has to have a pretty high correlation” then I suggest you look at the income statement of Toyota Motors or Honda. These companies sell cars, but for some reason their sales are soaring even while the price of oil goes sky high. Toyota’s sales have increased by 30% over the last two years while oil has doubled. Honda’s sales have increased 25% over the same period. GMs sales haven’t increased at all.

    I see no correlation at all between car sales and oil prices. The only correlation I see (drum roll please) is between innovation and revenue growth (shocking that innovative companies grow earnings at higher rates than those that don’t innovate at all).

  18. David Silb commented on Feb 13

    I thought the question posed was “what Other companies might need to hedge.”

    On the subject of Ford and GM I have this to say.

    If these two giant firms were unable after all this time (and I am talking about the 70’s until now.) To get their act together and realize what the world market was doing and going to do; and that their product was inferior to competitors then they deserve whatever they get.

    The writing was on the wall for years and they must of chose not to read it.

    I could go on and on but I will not because I believe the question was what other industries may be subject to higher commodity prices.

    Building with respect to lumber.
    Technology in respect to gold.
    And ofcourse Power with respect to energy prices.

    All would need to buy commodities that they may not be able to pass costs on to buyers

    BTW if GM and Ford hedge in the commodities market it must be some kind of arbitrage to offset losses from loss in sales of cars or something.

    It makes no sense for them to hedge oil since they produce cars and don’t buy much in the way of fuel.

  19. Jason commented on Feb 13

    TTC- Short Snow Futures
    MER-Short S&P 500 or Wilshire
    BAC- Libor Short
    RUTH-Long Cattle
    DAVE- Long Hogs
    Dracula Hunters – Long Silver

  20. Paul commented on Feb 13

    It seems the solar power companies needed to hedge tome basic products like the type of silicone used in manufacturing solar cells, but didn’t. Several stories note the cost of these raw materials are increasing and in some cases unavailable. (apparently they needed to hedge their own industrie’s success.)

    If ethanol takes off, the oil companies will need to hedge corn…..

  21. Jan commented on Feb 13

    People seem to be unclear about the purpose of (corporate) hedging. Generally, the idea is to manage the impact of economic exposures to the business over some period of time. It is supposed to make your business results less volatile. It is not a panacea.

    As some have pointed out, hedging can be costly, but more importantly, hedging only smoothes out and reduces the impact to a company’s bottom line over time. If oil prices stay high, however, most businesses are ultimately impacted, whether they hedge or not.

    On the question of whether GM should hedge oil, my view is that it should not since the price of oil is not a direct input to GM’s process, and hence it would be considered a “speculative” hedge. This type of hedge would create volatility on the income statement (pretty much the opposite of what they need).

    I agree with those that state that GM’s problem is that they got addicted to profits from large SUVs while people had money to burn from the equity and housing bubbles, and didn’t plan for the time when the consumer would turn to more fuel-efficient vehicles. Where have I heard that story before?

    Coke and sugar, on the other hand, are a different issue. Seems to me this is a perfect example of a commodity exposure that should be be hedged, for some of the reasons I noted in my opening paragraphs.

  22. Fred C. Dobbs commented on Feb 13

    You ask whether companies whose costs may be tied to traded commodities hedge, and the answer is the smart ones do. For example, I worked at Formost Dairies in 1961 -1963, the largest US dairy, where its most profitable product was ice cream, with a large percentage of the product being sugar. The Treasurer’s office hedged daily, and, during one quarter, at least, its hedging doubled the company profits.

  23. Estragon commented on Feb 13

    Personally, I’d prefer that public corps be restricted in their ability to hedge because:
    1. It’s a area of potential earnings manipulation and balance sheet games.
    2. I want management to focus on producing efficiently and to respond to price signals appropriately, not hedge them away.
    3. I can assess price risks and hedge them myself if and to the extent I want.

  24. Dan Arlandson commented on Feb 13

    GM and Ford are failing at their core competency of building cars. What makes you think they will do any better trading oil? Remember April of 2001, when Ford blew $1b (!!!) due to its inept trading of palladium?

  25. Zack commented on Feb 14

    Two sectors that should hedge natural gas are cement and chemicals (especially agricultural chemicals like nitrogen compounds).

  26. sun bin commented on Feb 19

    yes, there is a hedge.

    buy oil company stocks.

    but seriously, i agree with those it is more a marketing segmentation strategy than hedging question

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