The Hedging Corner: Plastics and oil, inextricably linked


The transparency and, therefore, fairness of resins prices in physical (i.e. cash) markets is a top concern among processors. Most other commodity markets are far more transparent than resins. Finding current prices for energy, metals, grains, etc. is primarily a matter of checking the futures markets in those commodities.

While recently opened resins futures contracts in Polypropylene, HDPE, and LLDPE are certainly transparent - and somewhat easy to execute via CME ClearPort or open outcry on the NYMEX - are they fair indicators of prices in the over-the-counter markets like other commodity futures contracts? If so, are they the best and only means for hedging resins prices, or are there more liquid and option-able alternatives that enable hedgers to hedge more wisely and cost-effectively - and, by the way, limit their vulnerability to being second-guessed by internal or external naysayers? Based on an analysis of daily prices, it appears so.

As noted in the Purvin & Gertz and CMAI Upstream/Downstream process chart, resins and crude oil are inextricably linked. Given that, and setting aside for now the role of natural gas prices, one would expect a correlation between resins and crude oil prices. What are the correlations? Is the frequency of the data important?...
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