Commonly used indexes are resin prices published by Chemical Data Inc. RTI , a consulting firm that advises processors on materials costs. A processor is better protected if it negotiates different types of contracts with different suppliers, Bowie says. One contract could be based on an index, another on spot-market prices, a third on monomer prices, and a fourth on an index with a floor and ceiling to limit the range of movement.
One PVC siding extruder structured its contract as an average of several indexes with a variable discount. If the index price in any month exceeded the contract price for the preceding February typically a busy month for siding , the discount would be the difference between the current price and the February price.
Bowie believes the best approach is still to sit down and negotiate with resin suppliers each month. Financial hedges for plastics buyers have been around since at least , when four companies launched over-the-counter forward contracts to buy and sell resin: Shell Petrochemical, Enron, Koch Industries, and Louis Dreyfus. Today, Dreyfus is the only one of the original four that still writes custom forward contracts for plastics.
They are based on the differential between a fixed price negotiated with Dreyfus and a published index. Such hedging still is not widely used for plastics, nor are the contracts big. Last year, some of the companies that bought these forward contracts looked very smart indeed. Last May saw the arrival of a significant new price-hedging tool. PET futures may be announced this year. In a properly functioning market, futures contracts are settled To give trading volume a chance to build, the LME offered a moratorium on delivery for the first three months.
From June to December, contracts totaled about 1 billion lb. Around 80 companies generated that trading volume, roughly 20 of them resin producers and the rest resin brokers, processors, and end users. LME contracts hedge only a few plain-vanilla grades of polyolefins that are expected to parallel price moves in higher-value grades.
In a well-established futures market, the contract and actual market prices tend to converge as the settlement date approaches. But this market is new, and instead of convergence, big disparities arose between paper and market prices. Observers say a number of processors misunderstood the nature of commodities futures. He thinks the LME underestimated the length of the learning curve for plastics processors.
Some of the early futures buyers purchased contracts for single lots for the shortest time period, and instead of settling them, they let them expire and took delivery of actual resin, says George Adcock, market development officer at Triland Metals Ltd. They are assigned a specific lot, which could be in any LME warehouse around the world. So they could be assigned material in Singapore when they want it in Houston, and they would have to make swaps to get the resin to where they can use it.
Post-consumer and post-industrial resins sell at a substantial discount from virgin, but their price movements tend to parallel those of virgin prices. Some former buyers of offspec resin found bargains dwindling and switched to recycle. Such a switch can bring a one-time cut in resin costs but no lasting immunity to the ups and downs of materials prices.
For example, Trex Co. But at current price levels, it relies entirely on recycled stretch film and other film waste. Trex is now looking for less expensive sources of recycle, such as agricultural film and mixed plastics from municipal recycle collection. This mixed waste is typically landfilled or exported because not many companies here can use it, so prices are low and steady.
Since even post-consumer plastic is more expensive today, it pays to have a flexible process so you can move to less expensive reclaimed materials, Claes advises.
Tie Tek uses powder, film, pellets, and every form of regrind. Using industrial scrap became essential to blown film processors in construction and agricultural film markets, largely because Poly-America, one of the largest in that market, has a business built on smart resin buying and blending industrial scrap.
Since demand for recycle has soared along with virgin prices, many recyclers are sold out. So using recycle is not for occasional dabblers. You will need to form long-term supply relationships, just as you would with virgin suppliers. Tie Tek, which last year used about 10 million lb of recycled plastics and close to 3 million lb of shredded tires, relies on a multi-year supply arrangement with the third-largest recycler in the country, as well as a relationship with a toll grinder and a long-term supply relationship with a tire recycler.
Tie Tek plans to use 25 million lb of recycled plastics this year, when its second plant in Marshall, Texas, gets into full swing.
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