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The futures and options markets in metals, as well as in agricultural and energy commodities, are widely used with prices fully accepted and embedded in standard industry practice. For the plastics industry, however, the process of managing price risk through hedging has yet to become well established.
The management of financial risk, in many ways, is not new to the plastics industry. Property insurance, for example, is a form of risk management as companies are covered from losses through plant fires and other liabilities through their insurance.
Hedging is a different risk management tool but it also offers a similar level of certainty; enabling organisations to lock-in future prices and therefore more confidently focus investment on research, development and other capital expenditure.
The intense price volatility that the industry has suffered in recent years is starting to become unmanageable for many parts of the supply chain. Producers attempting to pass on rising prices are meeting resistance as the converters themselves are typically under pressure from consumers to maintain previously agreed prices. This means that converters are increasingly ‘squeezed’ in the middle, and supply chains, rather than the suppliers, are competing.
Whilst the plastics industry supply chain grapples with these issues, the emergence of new world economies, such as China, and their demand for industrial raw materials is fundamentally changing the global balance of supply and demand. With these new market conditions, and with no indication of when they will end, the plastics industry desperately needs a long-term solution to the problem of price volatility.
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