e-Global Trading Webcast at AmericaPlast Protecting petrochemicals physical stock positions from energetic drivers volatility

1. How to Protect your Energetics Long Positions

2. Como proteger sus posiciones fisicas de derivados energeticos
Introduccion al uso de herramientas financieras pro-activas

3. » Every energy derivative transformer faces an
implicit financial risk directly related with the
corresponding energetic physical stock holding
process.
» If you are a plastics goods manufacturer your
plastic raw material physical stock is exposed to the
corresponding market price variation(Volatility)

4. » If the LDPE price goes UP your LDPE physical
stock earns an additional value, Depending on
your commercial strategy, you can make profits
with that issue
» If the LDPE goes down your LDPE physical stock
loses an addional value and depending on your
commercial strategy, you can lose profits with
that issue

5. » In general terms, a time period with RM prices
going up helps you to improve profitability, if
your supplier keeps delivering your necessities
because of the referred extra value added to
your existing physical stock
» In general terms, a time period with RM prices
going down erodes your profitability due to the
referred lose taken from your existing physical
stock

6. » There are basically two clear actions to be taken in
order not to reduce your operational profits keeping
your regular buying-production-selling activities
» 1) Financial Hedging Strategies: buy “ insurances”
reducing your profits all the time
» 2) Pro-Active Profit Generation(PAPG): Add an extra
profit to your operation either when energetics go up
or when they go down

7. » Some operational “insurances”
» There are a lot of possible financial instruments in order to
reduce your energetic exposition using a non speculative or
conservative approach:
» Remember that your transformation company, by definition is
always a LONG player
» a) Buying Energetics PUT Options(assuming an eventual
bearish scenario for the considered energetic)
» b) Buying and Selling Energetics PUT Options
(Debit Spreads= cheaper but less effective than only buying
PUTS)
BUT all these strategies have something in common: all of them are
DEBIT STRATEGIES SO THEY ADD COSTS TO YOUR OPERATION

8. » Let’s suppose that instead of adding a permanent extra
cost buying “insurances” or guessing when a certain
energetic suggested move can really show an important
up/down move before buying an “insurance”,
» Instead of using those “adding costs” actions,
» We began to use a permanent financial method to
consistently add long term profits to our productive
physical operation through a conservative “ financial
trading operation” relating our energetic instrument
to one of its “price drivers”

9. » We have to define the instrument and the driver
» We have to define the specific financial tool and
the financial strategy
» We have to dimension or size the financial
operation, that means how much of our
“petrochemical volatility risk” we want to cover or
control with our proposed financial operation
» Finally we have to back test the whole strategy
and eventually adjust the plan or some part of the
strategy

10. » Crude oil- Natural gas
» Naphtha – Ethane
» Ethylene
» LDPE, LLDPE, HDPE
» Plastic Product
Financial
Liquidity
_
+

11. » Methodology

12. 0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
AxisTitle
Ethylene

17. » Let’s analyze an extended period of time
» March 2010- May 2013
» P6= HDPE
» CL= Crude Oil
» Trying to find the synchrony and how
good/successful the signals are

22. » We found CL and Polymer macro movements
and macro trends synchrony most of the time
» We have a solid Buy/Sell Signals System with
about 70% average of success rate and with a
clear 1.5-2.0 Sharpe Ratio( average
winners/average losers) inBOTH, crude oil and
polymer
» The analysis was carried out during more than
3 years period

23. » Applying the Signals system to the higher liquidity
driver(CL Crude Oil Instrument)we have a solid and
sustainable additional profit source to protect our
long physical position of polymers from energy
price variation
» We can trade Cl or its equivalent financial
instrument taking advantage of both up and down
moves. We will have Bi-directional profit
generation and not only one up move positive
direction as we have only have with physical long
positions.
» Additionally, remember that when the polymers
go down, you always lose money with your
physical long positions

25. » You need to “size” the trading pro active financial strategy to be in
agreement with your petrochemicals/raw materials
» You only need to take an additional fraction of your physical risk
related with petrochemicals raw materials using this financial strategy
» Additionally : There are key advantages of using this protective method:
A)You will be applying this financial strategy into the same petrochemical
business with a simple logical synergic advantage: you will receive market
intelligence for your regular business, empowering your market knowledge
and general business overview to improve your decision-making process
B) You need to only compensate the historical volatility risk of holding a
petrochemical physical position through a very cheap financial strategy that
will statistically generate long term regular profits: You don’t have 100% of
capital risk related to your physical stock.

26. » Let’s suppose this simplified operation:
» You regularly process 100 ton/ month of
Polyethylene at 200,000 US$ landed cost
» You keep 30 days of in-house raw material stock
» You buy 30 days in advance of delivery( prior
month)
» You transform, sell and deliver in another 30
days
» Your total risk period = 90 days
» Your total $ risk = 600,000 US$

28. 0.75
0.54
= 0.75-0.54 = 28%
0.75

29. » A 25 % of maximum statistical historical risk for your
physical stock seems to be something very conservative
» A realistic factor taking in account that you will not lose all
this money every time a 25% price up/down happens =
0.50. You probably sold with your prior high price, or you
didn’t sell with your new high price
» So 600.000 x 0.25x0.50= 75.000 U$S to be compensated with
pro-active profit
» Historically the system showed 20-25 points of generated
profits, so size of crude oil to be traded = 3 contracts
» To trade 3 contracts you need to hold a futures trading
account= 10.000 to 25.000 US$ , depending on the broker
house , maybe less
» If the up/down move happens, you will compensate
» If the move didn’t happen, you add extra profit to your
business
» And remember, the larger the move, the more money you
earn with crude oil trading, because we trade volatility

30. » To decide when Oil/Gas (drivers) and polymers
are synchronized to reinforce/increase your
physical polymer buying activity
» To discover when your raw materials supplier
is trying to sell high right when you have sell
signals.
» To decide when not to buy or to reduce buying
activity

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