Savvy customers follow raw material prices as closely as processors

By Catherine Kavanaugh
Staff Reporter

Published: April 21, 2014 2:25 pm ET
Updated: April 21, 2014 2:30 pm ET

Image By: Michael Marcotte/Plastics News Peter Schmitt, managing director at Montesino Associates LLC, speaks about film and sheet pricing at the Plastics Financial Summit.

Related to this story

Topics Packaging Film & Sheet
Companies & Associations

CHICAGO — Savvy customers closely follow the prices of raw materials. The result: in the film and sheet segment of the plastics industry, even if processors could pass along every increase instantly, they would still face the challenge of low margins.

Customers tend to see the value of film and sheet as the value of the raw material, said Peter Schmitt, managing director at Montesino Associates LLC.

“If we look at the end user, the people buying our film, there’s little willingness to pay for the processing step,” Schmitt told attendees of the Plastics News Financial Summit on April 2. “The value is more and more perceived to be the raw material.”

Is this a zero-sum game?

It doesn’t have to be.

Schmitt recommends merging conversion steps for barrier layers that extend shelf life or guard against moisture, gas, oxygen and chemicals into mono-film processing when possible.

“You’re moving the value away from one material into your film,” Schmitt said. “It changes the fundamental economics.”

For example, PVC extruders can go from a margin of 25 cents per square foot to $3 with a laminating step. Sure, customers might complain the film now costs 10 times the price of PVC.

“But gosh, it’s got 40 times the barrier,” Schmitt said.

The extra step can take processors from captive-margin situations, which benefit only resin suppliers, to getting some margin back to the merchants.

Printing, coating and laminating are common processes to add value to film. So is percent of recycled content. And, wider use of intelligent films is on the horizon.

Smart films contain high-tech features like sensors that detect pathogens in food or radio frequency identification (RFID), which interfaces with a network to track products. RFID could usurp the universal product code one day and allow for checkout-free grocery shopping.

“In the next five years, it will be fascinating — bar codes, chips, RFID,” Schmitt said. “There’s going to be a huge demand for intelligent film and it’s a way for us to differentiate.”

Another way to free captive margins is to go on offense, according to Tom Langan, a consultant with WTL Trading Inc. who specializes in commodity-price sensitive businesses.

“Why leave yourself exposed to the marketplace?” he asked. “Sell it forward. I’m talking about strategies to implement in the next month and months out.”

Selling forward involves buying resin at a fixed price and selling a product at a fixed price. To address concerns about resin prices dropping, processors can also sell a put option that gives their customers downside-price protection.

“You determine what the premium is,”’ he said.

Processors also can buy a call option to protect themselves in case resin prices collapses. The option lets them lock in the lower cost.

“Get rid of the option you have and now you have a big, fat margin,” Langan said. “Options, in short, give you time. You don’t have to hold onto them. They are tradable, particularly in the futures market.”

While call options come at a price, the premium is only too much if you hold it, Langan added. He urges plastic processors to learn more about options and use them.

“You will love them and you won’t look back,” he said.

Langan argues that plastics processors will have no competition for this strategy.

“Anyone out there offering fixed-price deals forward, options insurance against the price? It’s great to have the playing field all to yourself for once,” he said.

To establish a program, executives need to write a margin management policy to formalize objectives and rules and then put an experienced risk manager in charge of it.

“Happy margins,” Langan said. “They will no longer be captive. You go get them.”


Comments

Savvy customers follow raw material prices as closely as processors

By Catherine Kavanaugh
Staff Reporter

Published: April 21, 2014 2:25 pm ET
Updated: April 21, 2014 2:30 pm ET

Post Your Comments


Back to story


More stories

Image

Bemis Co. reports sales growth

April 24, 2015 9:57 am ET

Bemis Co. Inc., in what the company is describing as a strong quarter, saw consistent earnings from continuing operations.    More

Image

KHS cuts packaging with direct printing on PET bottles, adhesive multi-packs

April 23, 2015 1:39 pm ET

KHS GmbH has been pouring a lot of time into solving issues related to direct printing on PET bottles, and after eight years of work, everyone...    More

Image

MeadWestvaco joins the Recycling Partnership

April 23, 2015 11:19 am ET

MeadWestvaco Corp., a global packaging company with some operations in plastics, is joining the Recycling Partnership.    More

Image

Sidel, BMS reach agreement on spindle patent case

April 20, 2015 1:24 pm ET

Sidel Group and Blow Mold Services LLC have reached an agreement in Sidel's patent infringement lawsuit against BMS involving the spindle chain on a...    More

Image

Adidas phasing out plastic bag use

April 20, 2015 11:50 am ET

Sporting goods company Adidas AG is phasing out the use of plastic bags in its own retail stores as part of a larger effort raise awareness about ocea...    More

Market Reports

Plastics Recycling Trends in North America

This report is a review and analysis of the North American Plastics Recycling Industry, including key trends and statistics based on 2013 performance. We examine market environment factors, regulatory issues, industry challenges, key drivers and emerging trends in post-consumer and post-industrial recycling.

Learn more

Injection Molding Market Analysis & Processor Rankings

Plastics News BUNDLED package contains our in-depth Market Analysis of the Injection Molding segment. You will gain keen insight on current trends and our economic outlook.

As a BONUS this includes PN's updated 2014 database of North American Injection Molders RANKED by sales volume. Sort, merge, mail & prospect by end market, materials processed, region, # of plants and more.

Learn more

Plastics Caps & Closures Market Report

The annual recap of top trends and future outlook for the plastics caps & closures market features interviews with industry thought leaders and Bill Wood’s economic forecast of trends in growing end markets. You will also gain insight on trends in caps design, materials, machinery, molds & tooling and reviews of mergers & acquisitions.

Learn more

Upcoming Plastics News Events

June 2, 2015 - June 3, 2015Plastics Financial Summit - Chicago 2015

September 15, 2015 - September 17, 2015Plastics Caps & Closures - September 2015

More Events