By Tim Johanson
Resins. If you don’t work in the plastics industry, it’s probably a term you’re not all that familiar with. But, for those who earn their living making plastic products or wrapping the products they produce in plastic packaging, it’s an important component of business. Ethylene, propylene, polyethylene, and polypropylene are just a few of these resins that can be used to create plastic bottles, containers and packaging.
The pricing of resin is volatile, and can represent a significant business expense risk. Because, as with many other commodities, the price of resins can fluctuate widely from month to month.
What’s interesting is that resin hedging has not been adopted by that many plastics consumers. Some choose to do nothing, and, as a result, find themselves susceptible to wild market swings that can lead to budget uncertainty and significant changes in monthly expenditures for the same monthly volume of product.
Some plastic consumers opt to manage their resin risk “physically.” That is, they buy directly from a resin supplier and negotiate a fixed price individually—not based on a financial index. This approach works well in spots, but requires the physical supplier to agree to fixed price terms, which in some cases can be difficult to get.
Finally, some sophisticated plastic consumers are managing their resin risk by using hedging tools like over-the-counter (OTC) swaps, a financial instrument used to manage the financial price risk of resin. These swaps settle against price indexes like Chemical Data (CDI), IHS Markit and PetroChem Wire (PCW). While their physical contracts contain the actual price fluctuations due to the changes of the index, the financial swap with Cargill moves in tandem with the price changes – and therefore off-sets any increase or decrease in the index. The customer pays the flat price agreed to upon executing the swap.
Makes sense, right? Then why aren’t more plastics producers taking this approach?
Good question. First and foremost, a lack of awareness and understanding are probably to blame (that’s where this post comes in). Many of the people working for these companies with responsibility for purchasing resins are very busy with a lot on their plate. They simply don’t have the time to do this kind of work.
And, truth be told, hedging risks through OTC swaps when it comes to resins is still a relatively new phenomenon (at Cargill Risk Management, we’ve only been doing this for six years). Many buyers see the resin market as too illiquid as well. Because this space is still so new, it’s tough to find independent sources to determine fair prices when it comes to swaps. However, most people believe we’ll see more liquidity in this market in the years ahead and, with that, we’ll start to see more plastic consumers starting to actively hedge risk using these OTC tools.
In the meantime, if you’re a plastics consumer, please review your risk exposure and see if a more proactive and strategic approach using OTC swaps might be something to consider.