The shale gas boom has flattened natural-gas prices and, by extension, made electricity cheap in the U.S. Those low energy prices - and stagnant wages - are giving U.S. manufacturers a significant cost advantage over manufacturing in other developed countries. The advantage flows all the way to resins processors, as depicted in this process chain:

Shale Gas Boom Part I: Keeping the Edge

The economic viability of the process chain, and the advantage to U.S. manufacturing, is almost entirely dependent on cheap and plentiful natural gas.  Will the shale gas production forecast by the Energy Information Administration be enough to meet increased demand from these sources (and, if yes, will environmental pressure subside)?

If the futures market is correct, manufacturers can count on cheap and plentiful natural gas for years to come. But counting on cheap prices -- and assuming there won't be price spikes along the way that may pull the economic rug out from under manufacturers (and resins processors with them) -- is foolhardy. Prudent manufacturers will hedge natural gas prices, including creating a price ceiling (and financing it with a floor) that virtually guarantees their edge over rival countries and companies.

Next time in the Hedging Corner: Keeping the Edge - Part 2

About the author: Tom Langan is an energy and petrochemicals risk management consultant dba WTL Trading. He helps buyers and sellers of commodities like resins control costs, secure profit margins, and increase sales. Articles in the Hedging Corner are selected from Tom's own Hedging Corner blog.