Transcript Applications: Power

Weather Derivative Applications
• Several Case Studies in the Australia Market will be
analysed including:
Air Conditioning
Power
Soft Drink Sectors
Theme Park
Clothing
Brewing
Mining
Ice Cream
Gas
Agricultural
Weather Derivatives
Weather Derivative Navigation
Agricultural
Theme Parks
Ice Cream
Soft Drink
Mining
Brewing
Power
Clothing
Gas
Air Conditioning
Applications: Agricultural (1)
• From plantation to harvest, precipitation,
temperature, sunshine hours and wind can affect
the quality and quantity of a crop.
• While there is a strong correlation between
fluctuations in crop production volumes and the
weather.
Applications: Agricultural (2)
BACK
Applications: Theme Parks (1)
• Despite outstanding marketing campaigns and
new state-of-the-art rides, theme parks with openair attractions are critically weather sensitive.
• From a slight mist to torrential thunderstorms,
adverse weather conditions reduce the number of
visitors to a park, and may delay vital maintenance
work when the park is closed to the public.
Applications: Theme Parks (2)
Applications: Theme Parks (3)
BACK
Applications: Mining (1)
• Despite advances in mining processes and
chemical technology, coal mines with open-air pits
are still critically weather sensitive.
• If excess precipitation falls, the potential of physical
mining deteriorates as drilling activity is reduced
and coal already mined becomes increasingly wet.
Applications: Mining (2)
BACK
Applications: Power (1)
• "Earnings from Australian operations were lower
primarily because of abnormally warm winter
temperatures in Victoria that affected both electric
and gas operations.” A utilities company in Texas, November 1999
• Demand for electric power is volatile, dependent
upon numerous unpredictable factors, including the
weather. New risk management tools can help
power generators mitigate the impact of extreme
weather conditions.
Applications: Power (2)
Applications: Power (3)
BACK
Applications: Gas (1)
• Mild winters depress the volumetric demand for
gas, whereas extraordinarily cold winters can
significantly boost demand.
• Consequently, the profits of gas distributors can be
very volatile.
Applications: Gas (2)
Applications: Gas (3)
BACK
Applications: Air Conditioning (1)
• No matter how much a company may spend on
outstanding marketing campaigns, if the weather is
not hot enough at the beginning of the season,
people will not buy outdoor furniture or air
conditioning units.
• "Mild weather conditions in October, continuing into
November, savaged sales of air conditioners and
outdoor furniture."A leading retailer, 1999
Applications: Air Conditioning (2)
• Historic sales statistics indicate that if the weather
during the weeks leading up to summer does meet
normal expectations, retailing profits will be
severely impacted - the general public buys
summer goods based on real need rather than
potential need.
• "It is estimated that $13.93 million of earnings for
the period from July 1999-October 1999 were
affected by adverse weather conditions."One of Australia's
largest outdoor and electrical retailers
Applications: Air Conditioning (3)
BACK
Applications: Ice Cream (1)
• Cold or wet summers have severe adverse effects
on the volume of ice cream and icy pole sales. This
may lead to downturn in profits for ice cream
makers, and has even been cited as the reason
why businesses have gone into receivership.
• An ice cream manufacturer in Adelaide typically
expects to generate more than 50% of its annual
revenue during the November-December period,
but if these months prove to be unseasonably cool,
sales suffer dramatically.
Applications: Ice Cream (2)
BACK
Applications: Soft Drink (1)
• The soft drink industry has a rich tradition of sales
predictions based on the weather. Above average
summer temperatures spur above average
consumption growth, and although some drinks are
more dependent on the climate than others, if two
consecutive sunny and warm weekends occur, the
demand for soft drinks is boosted for weeks ahead.
Applications: Soft Drink (2)
BACK
Applications: Brewing (1)
• In 1998 the world beer market grew by 1.5% to
1,298 million hectolitres when compared to the
previous year. However, the proportion of
consumer expenditures on alcohol reached a 10year low at 5.67%, leading to a decline in profit
margin per unit of business. Although it is possible
to estimate seasonal trading patterns, long-term
meteorological forecasts continue to have limited
accuracy, meaning that uncharacteristic weather
patterns continue to have adverse effects on beer
sales.
Applications: Brewing (2)
• A reduction in beer sales due to adverse weather
conditions reduces brewery revenues and in some
circumstances can force brewers to dump excess
stock or store it at expense. Without any financial
compensation, earnings can be dramatically
affected. Now, however, risk management tools are
available that allow brewers to hedge against the
financial impact of bad weather, reducing their profit
volatility and thereby leading to a lower cost of
capital.
Applications: Brewing (3)
Applications: Brewing (4)
BACK
Applications: Clothing (1)
• Although fashion influences the style of the season,
the weather can dictate what is bought in stores.
Unfortunately, as accurate long-range forecasts are
still limited, stock is already on the floor by the time
the weather actually arrives, and the forthcoming
seasons sales are at the mercy of mother nature.
Applications: Clothing (2)
• Although profits derived from clothing retailing are
also impacted by foreign exchange rates, taxes,
costs of raw materials and labour, unemployment
levels and the state of the national economy, the
weather is recognised as a major influence on
sales figures.
• Unseasonable summer weather can force discount
sales to be brought forward, and if this is followed
by a warmer than average autumn, summer sales
stock will be sold rapidly whilst the full price
autumn/winter lines remain on the shelf, leaving
retailers with a significant downturn in profits.
Applications: Clothing (3)
• A weather derivative could be structured to cover
the risk of warmer than average autumn/winter
weather that leads to a drop in outwear and an
increase in demand for cooler apparel that
ultimately could not be met with existing stock.
• Although stock may be sold at reduced prices or
taken back to a warehouse for storage, the effect
on the balance sheet would be stabilised with
compensatory payments from a weather derivative,
guaranteeing minimum earnings and reducing cash
flow volatility.
Applications: Clothing (4)
Thankyou
Dr Harvey Stern,
Climate Manager, Victoria
and
Griffith University
Mr Glen Dixon,
Associate Lecturer (Finance),
Brisbane