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Price Wise: Establishing a resins hedge account

In the roadmap for managing resins prices, I explained that risk management is a process whose purpose is to help achieve strategic and economic objectives (e.g. price certainty, increased utilization rates, hoped-for profit margins, etc.) Hedging is part of the process, and hedges should be executed after the objectives and a risk management policy are established.

In the roadmap for managing resins prices, I explained that risk management is a process whose purpose is to help achieve strategic and economic objectives (e.g. price certainty, increased utilization rates, hoped-for profit margins, etc.) Hedging is part of the process, and hedges should be executed after the objectives and a risk management policy are established. The risk management policy contains procedures and authorizations, and lists and prioritizes hedging tools and strategies. Hedges are typically financial, but physical transactions are also included.

For resins, hedging tools are exchange-based and over-the-counter (between counterparties), and need not be limited to fixed-forward purchases (a.k.a. "pre-buys") that so many processors fear because of downside price risk. Exchange-based (and some brokered) transactions require a hedge account that may be fully funded or marginable.

What are some guidelines for setting up a hedge account? Greg Ogborn, Director of Purchasing at Sunny Delight, shares his expertise:

There are a number of brokerages where resins buyers or sellers can open a hedge account, but I'm hesitant to specifically recommend someone in this forum. That said, here are some guidelines to follow in establishing and transacting a hedge account:


  1. Be sure the broker has an energy desk (e.g. FC Stone, Wells Fargo Advisors, and others)
  2. Resins are traded OTC, and futures are 'thin'. You need to work with someone who knows the players and can make a deal happen. Starting out, the thin market was my greatest challenge as I was accustomed to executing market orders in seconds on regular exchanges.
  3. Resin brokers play a far greater role than simply typing bids into the computer (like corn, wheat, HO, and other commodities brokers) so not just any broker will do.
  4. Transaction rates can always be negotiated, but it's pointless to go with "cheap" if the broker has no contacts. Assuming the cheapest broker can get a deal done, it's not likely to be at the best available price, so the cheapest broker may end up costing you more.
  5. There are 3rd party firms such as Accord Petrochemical or Houston Mercantile Exchange that serve in somewhat of a broker capacity, allowing you to get your bids in front of the largest possible pool. However, neither of them serves a clearing function, so if you use one of them you still need a clearing firm to oversee your account (e.g. margin requirements). If you can transact directly with a counterparty, you don't need a clearing firm; however, that involves credit risk, so I don't recommend it -- unless you have a credit department (internal or external) that can monitor counterparty credit risk for large volume or longer term transactions.
  6. An added complication for direct transactions with counterparties is the need for a Master agreement with each of them. For most buyers, Master agreements are burdensome. 
  7. In addition to brokered deals, if you want your trades to be on CME Clearport, you must register with Clearport. Forms are available on line.

Establish a hedge account following Greg's guidelines. A hedge account empowers you to use a range of financial and physical tools to control resins prices. It doesn't commit you to hedges; it simply puts you in position to execute them. Execution is up to the Risk Manager or authorized individual like your CFO. (See the roadmap.)

If you want to control your resins costs and achieve other key objectives, establishing a hedge account is an important first step. Based on the evidence, it's a step that most processors won't take, which makes taking the step even more advantageous for those who do.


About the author: Tom Langan dba WTL Trading is a risk management consultant helping processors control resins and others commodities costs, increase sales, and secure profit margins.

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