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Price risk management
For the plastics industry the process of managing price risk through hedging is a relatively new concept. 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.
The management of financial risk is not new to the plastics industry. Price risk management can be likened to the use of fixed interest loans or currency hedging which reduce a company's exposure to changes in interest or exchange rates.
Plastics futures are another risk management tool that offer a similar level of certainty, enabling organisations to manage price volatility by locking in future polymer prices, realise maintain profit margins and meet budgets.
Transparent Reference Prices
Plastics futures, unlike traditional retrospective survey pricing, provide industry with spot and forward looking reference prices to industry based on actual, rather than reported, transactions. These reflect the market's view of the future supply and demand.
Dealing with Industry Change
The intense price volatility that the industry has suffered in recent years is becoming unmanageable for many parts of the supply chain.
- Producers attempting to pass on rising prices are meeting resistance
- Converters are typically under pressure from consumers to maintain previously agreed prices
- Consumers are looking for more stable prices
This means that converters are increasingly ‘squeezed’ in the middle - not only are products competing but supply chains are too.
While the plastics industry supply chain grapples with these issues, the demand for industrial raw materials from developing economies, such as China is fundamentally changing the global balance of supply and demand.
With these new market conditions the plastics industry desperately needs a long-term solution to the problem of price volatility. LME plastics futures provide that solution.
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