Our counterparties come from a wide range of industries:
Gas and Electricity volumes are strongly influenced by weather factors. Indeed, when fuel or electricity is used for space heating or cooling, the demand for energy tends to vary according to the weather. These seasonal variations can have significant financial consequences for energy companies.
This is true for traditional energy companies, who experience a fall in demand during warm winters and cool summers. Also, alternative sources of energy such as hydro plants or wind farms are respectively at risk from drought or lack of wind.
Agriculture is vulnerable to many sources of weather risks. In particular, temperature and rainfall are two important production factors in agriculture. Weather derivatives offer farmers and agricultural companies an alternative to traditional crop insurance.
The experience of Coriolis Capital in the agricultural sector ranges from local farmers to government schemes in developing countries.
Companies from this sector are generally exposed to huge costs/penalties related to project delays. Weather being a major cause of these delays, it is not surprising that the construction industry has become one of the main buyers of weather protection.
The biggest Weather Derivative ever concluded (~500 million euros) was actually bought by a Dutch construction firm. The purpose of the deal was to hedge the company’s revenues against interruptions to work caused by freezing temperatures. The most common enquiries from the construction sector arise because of the following issues:
- External painting jobs that can only be done in dry conditions
- Construction companies engaging in excavation activities which can also be delayed by rain
- Cranes which cannot be used when it is too windy.
Enquiries from this sector come from a wide range of companies:
- Theme Parks are interested in hedging against too many rainy days especially during week-ends and holiday periods
- Concerts, Festivals and other outdoor activities are all strongly dependent on good weather and are very good candidates for a precipitation hedge
- A wide range of sporting events suffer from reduced attendance (hence reduced revenues) when the weather is bad
In addition more and more tour operators are trying to differentiate themselves from their competitors by offering their clients weather protection for their holiday. This generally translates into a voucher that is given to clients if they experience too many rainy days during their holiday. This type of protection has also been very popular with ski resorts, who hedge against a lack of snow during the holiday periods.
Every year we hear of a number of retail companies explaining that they were not able to meet their earnings targets because of unfavourable weather conditions. Weather Derivatives offer them a powerful tool to mitigate this risk. A very good example is the textile industry that can be badly affected by temperatures in spring and autumn when the new summer/winter collections arrive.
Most of the enquiries that we get from the retail sector cover the following scenarios:
- Sales of winter sports clothes or equipment which can be heavily impacted by warm winters
- Sales of certain food (fresh food, chocolate, ice-cream, soup…) and beverages which are affected by temperature
- Sales of gardening equipment or furniture which are strongly correlated to both temperature and rainfall in the spring/summer
FOOD AND BEVERAGE
The food and beverage industry is highly sensitive to temperature in the summer. According to Météo France, an increase of 1°C in the average monthly temperature can increase summer beer sales between 1.2% and 5.2% depending on the region. To a lesser extent this phenomenon is also apparent for other beverages.
Popular structures for beverage companies are based on Critical Temperature Days. As an example, Coriolis could provide a protection which would pay out for any day between July and August where the maximum temperature does not reach, for example 20°C.
Likewise sales of ice creams and fresh products suffer from cold summers and sales of chocolate, soups and warm food in general suffer from prolonged warm weather.
All types of transportation are affected by weather conditions.
In the winter, frost, snow and wind can cause huge delays (hence huge costs) to air, road and rail transportation. Prolonged precipitation can result in floods which can affect transportation.
Weather impacts both people and goods transportation. As an example, transportation of chocolate becomes very problematic during summer heatwaves.
Weather promotions are becoming more and more popular. Most of the time they involve products that are weather sensitive. However this is not a necessary condition. The idea is to run a promotion whereby customers get money back from their purchases if a given “weather event” happens. The company running the promotion then hedges itself with a weather derivative.
Here is a list of promotions examples on which Coriolis has worked:
- Toy retailer: “Buy your toys in our shops and if it snows on Christmas Day you will get money back”
- Golf: “Buy some equipment from our shops and if it rains on Father’s Day you will get money back”
- Snow related promotions are used extensively for products like ski holidays and equipment, snow tyres, snowmobiles, etc.
- Winter clothes: retailers get some money back from their supplier if they cannot sell all their stock because of a warm winter
- Car dealer: “Buy a convertible from us this spring and get some money back if it rains too much this summer”
- “Get 50% off all your ice cream purchases in the event of a cool summer”
Coriolis Capital Limited
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