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Forward curves for HoPP, LLDPE film, and HDPE are provided on a daily basis by CME using PCW prices. As of 9-24-2012, the curves look like this:
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Why do I compare forward price curves for resins with the forward curve for crude oil? Here's why -
Over nearly four years, price correlations are 80-85% between daily resins prices and front-month crude oil futures. They're even higher (85-90%) in 2012.
Given resins are petrochemicals, of course their pricing will be correlated with crude oil. But the fact that the correlations are so high, means forward resins prices will track forward crude oil prices; i.e. the shapes of the curves will be the same. At this time, flat.
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The Good News
The good news for processors is there are two effective means to hedge forward resins costs: resins futures for polypropylene or polyethylene purchases or crude oil for most any resin purchases. Using crude oil as a hedge empowers processors to choose low cost/low risk hedging alternatives: options. Options are the "smart way" to manage price risk. They may be used to limit upside price risk before locking in resins purchases and/or limit downside price risk after locking in purchases. Options-based hedging programs save buyers and sellers angst and money - lots of both. That's why using them is smart.
Next time: crude oil markets and options hedging strategies
Later on: price differentials as "triggers"
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.