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Copper Hedging/Derivatives - Coggle Diagram

- - - - Forward contracts are used to manage the commodity copper price risk arising from the Group’s sales and purchases. Most of the forward contracts have maturities of less than one year after the end of the reporting period.
    - - The Group purchases aluminium rods and copper on an ongoing basis for their own production. As a result of the volatility in aluminium and copper prices, the Group holds commodity forward contracts designated as hedges of highly probable forecast aluminium and copper purchases to reduce the volatility of cash flows.
        These contracts are intended to hedge the volatility in the purchase price of aluminium and copper for a period between 3 to 12 months based on anticipated raw material requirements. As at 31 May 2022, the cash flow hedges of the highly probable forecast aluminium and copper purchases were assessed to be highly effective.
        A net unrealised loss of RM1,028,000 (2020: a net unrealised gain of RM1,512,000) with a related deferred tax liabilities of RM247,000 (2020: deferred tax liabilities of RM361,000) was included in other comprehensive income in respect of these contracts. The amounts retained in other comprehensive income in May 2022 are expected to mature and affect the profit or loss in 2023 by a loss of RM781,000.
      - During the financial period, the LME metal prices were very volatile and we saw both Copper and Aluminium hit record high in early 2022. The metal price volatility does not affect the profitability of Cable and Wire as we adopt back-to-back booking together with futures hedging strategy for our metal requirements without taking any short or long position. Our major customers like Tenaga Nasional Berhad (“TNB’) and Telekom Malaysia Berhad (“TM”) are aware of the fluctuation in metal prices and hence their contracts are on metal variation basis. Nevertheless, the high metal prices strained the cash flow of the Cable and Wire subsidiaries as we need more working capital to acquire same volume of metal.
  - - - Commodity price risk The Group is exposed to price fluctuation risk on commodities mainly of palm oil and rubber. Risk management objectives, policy and processes for managing the risk The prices of these commodities are subject to fluctuations due to uncontrollable factors such as weather, global demand and global production of similar and competitive crops. The Group mitigates the risk to the price volatility through hedging in the futures market and where deemed prudent, the Group sells forward in the physical market.
    - - The Group uses forward currency contracts and commodity futures contracts to manage its exposure to currency and price risks, as well as to take advantage of favourable market conditions. The forward currency contract is not designated as cash flow or fair value hedges and is entered into for periods consistent with currency transaction exposure and fair value changes exposure. Such derivatives do not qualify for hedge accounting.
      - Commencing from 1 October 2018, the Group has designated certain commodity futures contracts as hedging derivatives to reduce the volatility attributable to price fluctuations of crude palm oil ("CPO"). Hedging of the price volatility of forecast CPO is in accordance with the risk management strategy outlined by the Board of Directors. There is an economic relationship between the hedged items and the hedging instruments as the terms of the commodity price and commodity forward contracts match the terms of the expected highly probable forecast transactions (i.e., notional amount and expected payment date). The Group has established a hedge ratio of 1:1 for the hedging relationships between the CPO sold and the forward commodity contracts as the underlying risk of the commodity price and commodity forward contracts are identical to the hedged risk components. To test the hedge effectiveness, the Group uses the hypothetical derivative method and compares the changes in the fair value of the hedging instruments against the changes in fair value of the hedged items attributable to the hedged risks.