Corporates 'must be prepared' for commodity volatility in the future

Vasin Vanichvoranun executive vice president of Kasikornbank, said volatility would be the new norm for companies as commodity risks are expected to be around for several years. Crude oil and copper are the key commodities that will be high in volatility this year, while foreign exchange and the baht’s value against the US dollar are also key risks that impact larger corporations.

KBank estimates that foreign exchange and baht volatility could increase during the global economic crisis.

The baht this year should move in the range of Bt29.5-Bt33 to the greenback.

Trade credit in the global market is a default risk for Thai exporters. The euro zone represents 13 per cent of export volume for Thailand and the US 11 per cent.

Regarding the new norm, larger corporations should not neglect the risk any longer despite their strong fundamentals. The financial crisis in 1997 convinced larger companies to be more cautious with investments, so they are in better shape in terms of return on assets (ROA) and earnings before interest, tax, depreciation and amortisation (EBITDA).

Over the past 10 years, the average ROA has improved to 7 per cent from 3 per cent and EBITDA to 18 per cent from 8 per cent. Yet, profit margins are not likely to increase sharply in line with ROA and EBITDA because of the lower competitiveness.

The trend of profit margins cannot be raised if larger corporations remain careless about their competitiveness.

A clear indicator is Thailand’s fall in the World Economic Forum’s competitiveness ranking to 39th in 2011 from 38th in 2010.

To protect themselves against volatility and build up their profit margins, larger corporations need to focus more on research and development and high-value products.

For larger corporations that might not be able to upgrade themselves, financial institutions can help by providing advisory services, comprehensive fund raising, liquidity and export insurance, he added.