Forward pricing for stability of supply

As polymer production increasingly moves away from Western Europe does buyer behaviour need to change?

The history of polymer production in Europe is rich, with many of the key developments including the discovery of LDPE and development of materials technology for the production of materials such as PP and HDPE/LLDPE taking place within the region. However over the last two decades the production of these materials has increasingly moved away from Europe towards the Middle East and Asia where the economics of production are significantly lower. In particular the attraction of converting gas to polymer and by so doing, both adding value and converting a volatile material into a relatively inert solid, is almost irresistible.

Despite the challenges of supply chains and the foreign currencies so far, European polymer converters have largely been insulated from the consequences of exchange rate volatilities and commercial price risk resulting from longer lead-times and have typically continued to enjoy product priced in the month of delivery on short notice. So far this has left the suppliers of material from outside Europe with the challenge of managing the supply chain and managing the risk in what can be a volatile market.

There is strong evidence that placing the commercial risk on the importer tends to increase volatility as attempts are made both to speculate on the market and also reduce risk by trying to anticipate market trends and react to them. Typically this tends to tighten supply in a market with an upward price trend and increase supply when there is a downward price trend as importers attempt either enhance profits, or secure purchase contracts against inbound cargoes and unsold inventories.

These very behaviours and the increasing proportion of imports are likely to be a significant cause of the increased market volatility seen in 2015.

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(Source: Plastribution Price Know-how 2015 Review & 2016 Outlook)

As the tide continues to turn has the time come for polymer converters to consider moving away from the traditional approach of pricing in the month of delivery and to start making forward commitments in terms of their purchases?

Such an approach would:

  1. Increase security of supply.
  1. Reduce volatility since the speculative behaviour of the sellers would be diminished.
  1. Reduce the sellers need to charge a risk premium.
  1. Put European converters on a similar platform to those in other parts of the world where forward buying is often the norm.
  1. Move the point of risk closure to the point of consumption where prices are more typically fixed.

Despite the combination of logic and market forces, it is suspected that old habits tend to die-hard, but here at Plastribution we are eager to form effective partnerships with customers to ensure reliability of supply and we are always eager to discuss your particular requirements with a view to ensure we provide an appropriate solution to meet your needs.