IMO, the most advantageous of the tools are options - limited cost & low risk "insurance" against
1) higher resin prices before you lock in a purchase or
2) lower resin prices after you lock in purchase.
The first involves price caps (call options); the second involves put options. Both are proven economically and strategically beneficial for buyers of commodities and equities.
Choices to match
Table 1 from shows a range of transactions for buyers or sellers consistent with a given market opinion or concern. Clearly, options provide several more cost and risk level choices than the buy/sell/do-nothing choices without them.
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| Table 1 |
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What's the upside and downside for resins buyers of executing one of the above transactions? Table 2 is indicative. Most processors default to strategies A or B; strategies C, D, and E are available with options.
The market isn't the problem
Many processors blame the resins market and, in some cases, suppliers for resin price volatility and resulting costs that exceed expectations or hopes. A supplier says "It [when the discussion turns to price] becomes a combative environment that's not very pleasant."
Volatility is here to stay because resins are petrochemicals and driven by crude oil prices. That's a fact which processors, until now, have had to live with, executing highly risky "fix or float" buying strategies that often lead to market frustration and angst. Now the market (via Cargill ETM and, perhaps, others) offers choices that enable processors to buy smarter and save money and trouble. The sooner processors learn and take advantage of those choices, the better for them and their customers.
| Table 2 |
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Takeaway
Learn and position yourself to execute resin buying strategies C, D, and E above. Then spend more time making better products and meeting customer needs, and less time worrying and complaining about resins prices and profit margins.
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About the author: Tom Langan is Risk Manager - Refining & Petro Chemicals for Oahu Capital Group (Asia) Pte. Ltd. Tom has over 20 years of experience in commodity, options trading and risk management. He has developed and implemented risk management programs for electricity, natural gas utilities, oil companies and plastics processors.