As discussed in last week's Hedging Corner, price transparency and price fairness are concerns among plastics processors and anyone else who buys plastics. How do you know the over-the-counter (OTC) offer is fair and reasonable if you don't have an unbiased price gauge to compare it to like buyers of other commodities?
If the market history of other commodities (particularly energy) holds true in resins, then resins futures are likely to become the price "barometer" -- but what about now? If you're not sure about a physical OTC price, you will be unsure about the price of a direct resins hedge. In addition, since hedges are, fair or not, subject to more scrutiny and second-guessing than physical transactions (even among companies with risk management experience), so what's a new resins hedger to do?
As shown last week, the correlation between daily resins prices recorded by PCW and crude oil futures is surprisingly high. How about over less frequent pricing periods, which are more reflective of resins pricing? Does the high correlation still hold? Apparently so, as this chart for polypropylene prices vs. crude oil indicates.