Price Wise on Resins Futures: A Better Idea

09/23/2011

Last week's Price Wise [On Stingy Customers & Profit Margins] reported on the death of CME's resins futures contracts. After several months, the contracts have zero trading volume and open interest, rendering them illiquid and useless for effective risk management, let alone trading. They may not completely disappear soon, but their illiquidity is a tombstone.

Resins are not the first futures contracts to flop. For similar reasons (lack of experience and incentives, fear of failure, unclear directives, no risk management policy, etc. among industry participants, and a 'build it and they will come' approach by the exchange), nearly forty electricity futures contracts are also moribund. Yet, happily for electricity buyers and sellers, electricity futures aren't required to manage medium- to long-term price risk. Electricity market participants have, in natural gas, a highly correlated alternative. Natural gas is the incremental fuel for electricity generation across the U.S. and, therefore, sets forward market prices for electricity. Natural gas futures, highly liquid and option-able, made the death of electricity futures academic for buyers and sellers who want to manage risk.

What about resins? Is there an alternative, highly correlated commodity to manage long-term resins prices? Yes. As discussed earlier in Price Wise and on my website, resins are petrochemicals and their prices are tied to crude oil. Price correlations are over 90%, which is close enough to control most resins costs, protect profit margins, and retain those 'stingy customers'. However, is 'close enough' good enough?
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