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Why Aren’t More Plastics Consumers Embracing Hedging

Why Aren’t More Plastics Consumers Embracing Hedging

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.

These materials have been prepared by personnel in the Sales and Trading Departments of Cargill Risk Management, a business unit of Cargill, Incorporated based on publicly available sources, and is not the product of any Research Department. These materials are not research reports and are not intended as such. These materials are for the general information of our customers and are a “solicitation” only as that term is used within CFTC Rules 1.71 and 23.605, as promulgated under the U.S. Commodity Exchange Act. These materials are provided for informational purposes only and are not otherwise intended as an offer to sell, or the solicitation of an offer to purchase, any swap, security or other financial instrument. These materials contain preliminary information that is subject to change and that is not intended to be complete or to constitute all of the information necessary to evaluate the consequences of entering into a swap transaction and/ or investing in any securities or other financial instruments described herein. These materials also include information obtained from sources believed to be reliable, but Cargill Risk Management does not warrant their completeness or accuracy. In no event shall Cargill Risk Management be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained in these materials and such information may not be relied upon by you in evaluating the merits of participating in any transaction. All projections, forecasts and estimates of returns and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions. Actual results will vary, and the variations may be material. Nothing herein should be construed as an investment recommendation or as legal, tax, investment or accounting advice. Cargill Risk Management is a provisionally registered Swap Dealer and operates under “Order of Limited Purpose Designations for Cargill, Incorporated and an Affiliate.”