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Financial Risk Management

Exchange Forward contracts

Case Study: Polymers. The management of financial risk, in many ways, is not new to the polymer 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 offers a similar level of certainty. Organisations producing or requiring materials for use in producing goods can lock-in future prices to focus more confidently on procurement and allocation than counterparts where hedging ability of raw inputs remains elusive. Across the global polymer industry the intense price volatility 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 (Users/Buyers) 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. With the emergence of new world economies, particularly in China, India, Brazil and Turkey, demand for raw materials is fundamentally changing. With these new market conditions, and with no indication of when they will end, the polymer industry desperately needs a long-term solution to the problem of price volatility.

A key function of the Chicago Mercantile Exchange remains the provision to industry of effective risk management tools enabling hedging using forward contracts.

Nanomaterials [NMs] remain a relatively new addition to the array of raw materials and commodities available to convertors to deliver goods, services, resources and applications for industrial and consumer use. However, the NM industry producer base remains confronted with a series of dilemmas as to what to produce for use in a particular sector or application against the backdrop of limited capital availability to deliver upscale to economies of scale based on any real certainty of trade. Granted, there has been much debate to ponder the dilemma but limited progress to deliver economies of scale and the risk management tools required to make industrial scale uptake of nanomaterials practical beyond appeal to the novel to exploit potential in high-volume and cash generative applications to the benefit of producers and user alike. NM producers face a choice between working with a proven system of effective allocation and procurement management or the alternative pursued by material industries regularly experiencing difficulty across their respective supply-chains. These industries stand out as examples where the intense price volatility these industries experience proves unmanageable for many parts of the supply-chain. A common feature associated with such industries remains  a tendency to consolidate, restructure or force through higher producer prices as means to address problems further eroding end user willingness and dependence. Contrasted with the fortunes of these industries stand those organised on a formal exchange footing. Here use of hedging in risk management provides a level of certainty benefiting producer and end user alike. Hedging enables organisations to lock-in future prices and therefore, more confidently focus investment on research, development and capital expenditure.  The ability to hedge is provided to key material industries: oil, agriculture, industrial and precious metals through use of exchange traded forward supply contracts. This system is now available to NM producers via INSCX™ exchange.  A forward contract enables a producer or user to supply or purchase now a commodity required for delivery at a later date. The system of forward contracts in nanomaterials listed by INSCX™ exchange is referred to as Depositary Receipts, [DRs]. These are listed for trade on a variety of time cycles. Forward contracts also serve to enable NM producers to finance upscale on the basis of trade certainty as opposed to speculation. This system will prove invaluable to NM producers requiring to move beyond proof of concept to test potential uptake to offer viable commercial alternatives across a multitude of nanomaterials and functional variants.

INSCX™ exchange provides NM producers with means to self-finance upscale, deliver trade certainty/proof of quality and risk management to better plan use of nanomaterials in high volume applications. The enabling of capital resource to support a producer base to deliver economies of scale remains a fundamental purpose of a commodity exchange. NM producers can choose to appreciate fact or accept the general approach taken to date continues hopeful speculation. Supply chain management is not a word, rather a defined system. The Off-exchange approach is proven of limited benefit to producer sustainability even in “established” material industries where excessive price volatility, limited economy of scale, supply/quality uncertainty impairs commercial ability to make use of any material category. NM producers are encouraged to recognise this and the fact potential alone is not enough to overcome the many obstacles to progress. Producers must be able to plan what to produce, when, to what price and quantity based on certainty of uptake. Without a basis to achieve this, and means to aid users protect against shock, nanotechnology remains an appeal to the novel as opposed to industrial stage.