The Hedging Corner: Must-Have Tools for Resins HedgersThe Hedging Corner: Must-Have Tools for Resins Hedgers
As discussed in Hedging Rules, rules (i.e. a risk management policy) should be established before any hedging takes place. The rules get decision-makers (and second-guessers among them) on the same page by specifying what to hedge, how far forward to hedge, approved hedging tools and strategies, authorizations, when hedges may be closed, reporting requirements, etc.
June 28, 2011
Getting to the rules requires a few steps. One of the most important steps is to identify and prioritize tools to limit or eliminate cost and margin risks. For resins hedgers, the tools provided by the CME are a must-have. In the words of one smart resins hedger, "We value price certainty, and hedging is the only way to get it. Our greatest single exposure is resin and I've been tasked since day one to come up with a hedging method. Initially, swaps were the only tool, but they were not transparent and always carried too much extrinsic value to be attractive. The new CME tools are the future ..."
Currently, there are five resins futures contracts trading on CME Clearport:
Group: Energy | Subgroup: Petrochemicals | Category: Resin
Contract size: 47,000 pounds | Quote: $/lb | Term: up to 24 consecutive months
If you process polypropylene or polyethylene and these CME tools are "the future" -- and you plan on having a future -- the sooner you understand and utilize these tools, the better for you and your company. Managing resins prices is not a luxury for manufacturers outside China and other subsidized environments. It's a necessity for longevity and success. Again, in the words of the smart hedger, "The greatest speculation is to do nothing, as you are clearly speculating that prices are going down; otherwise, you'd have a position."
Are the five CME tools the only means to manage future polypropylene and polyethylene costs? What about other resins like polystyrene? Do you need to wait for the CME to offer futures in those resins before you can manage their price risk? Nope.
As discussed at length here and here in the Hedging Corner and here on my website, polypropylene, polyethylene, polystyrene, and other resins track crude oil prices quite well (no surprise, since resins are petrochemicals). That means resin hedgers may use crude oil hedging tools (futures, swaps, options, and ETFs) in conjunction with or as a medium-to-long-term alternative to resins futures to manage price risk. Crude oil hedging tools are highly liquid and option-able. This is great news for smart hedgers and those who want to join them, but are waiting for other resins futures contracts or higher liquidity and transparency in the existing contracts before hedging.
As the saying goes, "The one who dies with the most tools wins." For resins processors, the ones who understand and use the right tools to control costs and secure margins win -- and have a bright future.
For help identifying and understanding the right tools to control your resins costs, email me at [email protected].
About the author: Tom Langan is a risk management consultant who operates WTL Trading. He specializes in commodity cost control, margin improvement, and revenue expansion for manufacturers and their customers.
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