AKRON, OHIO — Koch Chemical International is pounding the pavement to drum up interest in its 18-month-old petrochemical risk management venture.
KCI representatives have been traveling throughout the country in recent months to make resin makers and processors aware of their forward pricing services, which allow buyers to lock in fixed prices for materials instead of riding the commodity roller coaster.
Four companies now offer risk management services to the plastics and petrochemical industries. In addition to Koch, the others are Louis Dreyfus Energy Corp. of Wilton, Conn., and Enron Corp. and Shell Chemical Risk Management Co., both of Houston.
Houston-based KCI is a division of Koch Industries of Wichita, Kan., the second-largest privately owned business in the United States.
The company already provides risk management for industries such as crude oil and sees ``an unmet need in the petrochemical value chain'' for the same service, according to Mark Dobbins, KCI's vice president of commodity risk management.
``The petrochemical market is dominated by oil and chemical companies who don't have much to do with trading,'' Dobbins said in a Jan. 28 interview at Plastics News' Akron office. ``With the exception of a few companies, there's a philosophy of, `The market pays us to be in the value chain.' They tend to leave trading alone.''
But the practice has been around for decades, particularly in the agricultural market, where farmers use such financial tools as futures to hedge crop prices. Tools such as swaps and caps are being used in plastics and petrochemicals.
In plastics, risk management firms sell forward contracts at fixed prices and then settle them against market prices established by various consulting firms. A cap is a typical method in which the risk management company reimburses the client if prices rise above a fixed, pre-agreed level.
As a recent example of successful risk management, Dobbins cited Kraft Foods, which used funds it saved by hedging on agricultural commodities to increase market share for its Post cereal products.
``[Kraft] didn't look at it as, `Wow, we locked in at a low price and saved a lot of money,''' Dobbins said. ``They used it as a competitive advantage.''
The companies in the fledgling plastics risk management market ``all bring different strengths to the table,'' said Dobbins, who listed KCI's strengths as:
Its physical presence in the industry, including a No. 2 North American position in producing paraxylene, a key feedstock for PET.
KCI produces other specialty chemicals and recently entered the olefins world through a joint venture propylene splitter with Ultramar Diamond Shamrock in Mont Belvieu, Texas. The company also has operated a plastics trading business in Darien, Conn., for two years.
Its AA-plus long-term debt rating from Standard & Poor's, which is the highest rating a private business can achieve. Dobbins said this rating allows KCI to perform transactions beyond a year in duration.
Its market analysis, which is compiled by seven full-time staff members.
But Dobbins stressed that the venture's success will rest with end users and processors.
``If the end user decides he doesn't need it, it won't go,'' Dobbins said. ``The question is: Will the end user pay to take some of the volatility out of the business?''