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April 05, 2022 06:00 AM

Strategies in managing risk in resin buying

Frank Esposito
Senior Staff Reporter
Plastics News Staff
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    Resin buying forum
    Michael A. Marcotte

    From left: Tyler Cott, Kathy Hall, Elizabeth Hui, Lauren Pombar and Gerard Selvaggio discuss new strategies for resin purchasing at the 2022 Plastics News Executive Forum.

    Naples, Fla. — Risk management can help processors navigate the maze of resin pricing, according to a panel at the 2022 Plastics News Executive Forum in Naples.

    Risk management can include futures contracts that allow processors to lock in prices at certain levels and then receive or make payments depending on what happens to resin or feedstock prices. Doing so can reduce profit volatility and allow companies to invest in growth, according to firms that offer risk management programs.

    In the case of polypropylene resin, propylene monomer, which is widely traded, "has proved to be an excellent proxy contract," according to Kathy Hall, executive editor with OPIS PetroChem Wire in Houston.

    "[Petrochemicals] are every bit as sophisticated as energy at this point," said Hall, who founded the PetroChem Wire data business.

    Propylene and ethylene markets are centralized, but resins traditionally haven't been, according to Gerard Selvaggio, a partner with PP supplier Blue Clover LLC in the New York area. As a result, resin is sold either on a spot fixed price, index-based resin price or index-based olefin-plus price.

    "A fourth way to buy is potentially doing a fixed price for some of your resin needs," Selvaggio said. "In our case, it would be a physical delivery of the fixed cost of resins into your facility on a fixed price basis. Ultimately, it's that linkage to the olefin and natural gas commodity markets that allow companies like Blue Clover to offer that fixed price of resin to the customers."

    Elizabeth Hui, research and product development director for CME Group in Chicago, pointed out that futures markets "aren't anything new and have been around for over 150 years."

    CME, founded as the Chicago Mercantile Exchange, started with futures markets for agriculture, she added, followed by currencies and then energy, including crude oil, gasoline, heating oil and natural gas. CME now offers contracts on some plastic resins.

    Lauren Pombar of New York financial firm JPMorgan said that her firm was approached by clients after the financial crisis of 2008 looking for a way to hedge commercial risk in order to reduce counterparty risk. They then worked with Hall and PetroChem Wire to develop a standardized contract for some materials.

    Volume in plastics futures markets now is growing at a rapid pace.

    "If I look back to 2020, at the transactions we were executing with our corporates from a risk management perspective, in 2021, our over-the-counter volumes grew over 1,000 percent," said Pombar, head of North American corporate commodities marketing.

    "And if you look at year to date for 2022, the volumes we've done in the first quarter already are 70 percent of all volumes executed in full-year 2021," Pombar said. "I think that just speaks to new liquidity improving in this market and also the demands that we're seeing from our companies for more risk management strategies in this space."

    Hall said that risk management products for plastics are following the same historic patterns that allowed contracts for sugar and other products to evolve. "The need comes around people making expensive contracts that they can't manage," she added.

    Tyler Cott, petrochemicals vice president for supplier Enterprise Products of Houston, said that the growth of futures contracts "creates opportunities every day, where buyers and sellers come together in our market to physically transact, often times at a fixed price."

    "This has evolved over many years," he said. "These products used to trade maybe a couple times a week, and now they trade multiple times a day."

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