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Profitable Plastics: Resin price caps are here...

...along with the other right tools for you to control resins costs and secure profit margins

Tom Langan

November 9, 2012

3 Min Read
Profitable Plastics: Resin price caps are here...

Last time, I discussed resins price caps - insurance against resin prices moving higher than an acceptable future level. Price caps would enable processors to control resins costs effectively and economically and give them valuable time to make better purchase decisions and, consequently, save up to 5 ¢/lb in average resins costs.

I had thought resins price caps were not available in the OTC or futures markets, so processors who wanted to cap their price risk needed to buy the next best thing: options in crude oil, which is highly - but not perfectly - correlated with resins. Happily, for processors in North America, I was wrong!

Cargill ETM
In response to Resins Price Caps, Cargill ETM (Energy, Transportation, and Metals) informed me that they offer resin price caps and other risk management tools for up to two years ahead. The tools are financial only, but are precisely what processors need to manage resins costs and secure profit margins. In fact, they are the very tools I've been discussing in Profitable Plastics for months. In Cargill's words:

Cargill ETM was formed in the late 1980's in order to manage exposure in energy on a centralized basis throughout Cargill globally. The resin desk was started three years ago in order to address the nearly $1 Billion Cargill spends on packaging on an annual basis. Cargill also made the decision to offer 100 % correlated index based swaps and options to other end users - seeing this as a need in the marketplace. [Great minds think alike.J]

We've helped some of the largest consumers of resin in North America minimize volatility and achieve price clarity (and peace of mind) on their resin expenditures.

Tim Johanson, Director

What do Cargill resin price caps look like?
Cargill ETM offers price caps settled against IHS/CMAI, CDI, or PCW indexes for up to 2 million pounds per month for up to two years. An example, based on November IHS/CDI contract prices, for 1Q2013:

Strike price

Resin

Premium (¢/lb)

At the money

PE

4.5

PP

6.25

5 ¢/lb out of the money

PE

3

The fact that Cargill offers price caps settled against the three most widely used market indexes enables most processors to offset the price risk perfectly in their contracted physical supply. Resins futures settle against PCW prices, so Cargill's offerings are more advantageous to processors than what the resins futures market could one day offer.

Takeaway
The wait is over for processors who want to effectively and economically control resins costs, secure profit margins, and beat the competition. Cargill ETM has brought the future forward. Take advantage of it. Learn more about the cost control tools Cargill ETM provides and position yourselves to buy them as your risk management policy authorizes. Then spend more time making better products and meeting customer needs and less time worrying about resins prices and profit margins.

Upcoming
Cargill ETM, Plastics Today, and yours truly work together to make controlling your resins costs easier than you might think.

About the author: Tom Langan dba WTL Trading is a risk management consultant. He helps manufacturers control resins and other commodities costs, increase revenues, and secure profit margins. Email Tom at [email protected].

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