e-Global Trading

How to Protect your Energetics Long Positions

e-Global Trading

Como proteger sus posiciones fisicas de derivados energeticosIntroduccion al uso de herramientas financieras pro-activas

Petrochemicals Transformation

» 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)

Raw Material price variation definitely afects your profits

» 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

From the financial point of view

» 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

So, what we can do to be protected against the referred raw materials variations?

» 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

Some financial insurances strategies

» 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

Let’s explore another approach

» 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”

Procedure

» 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

Petrochemical Chain

» Crude oil- Natural gas

» Naphtha – Ethane

» Ethylene

» LDPE, LLDPE, HDPE

» Plastic Product

Financial Liquidity

_

+

Let’s Analyze the Ethylene Price variation during the last 5 months

» Methodology

27-Aug

1-Sep

6-Sep

11-Sep

16-Sep

21-Sep

26-Sep

1-Oct

6-Oct

11-Oct

16-Oct

21-Oct

26-Oct

31-Oct

5-Nov

10-Nov

15-Nov

20-Nov

25-Nov

30-Nov

5-Dec

10-Dec

15-Dec

20-Dec

25-Dec

30-Dec

4-Jan

9-Jan14-Ja

n19-Ja

n24-Ja

n29-Ja

n3-Fe

b8-Fe

b

13-Feb

18-Feb

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Ethylene

Axis Title

Ethylene Spot

Ethylene Price- March 7/ 2014

Trying to find timing between polymers and energy drivers

» 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

CL vs P6 March 2010- May 2013

P6 – HDPE March 2010- May 2013

CL March 2010 - Jan 2012

CL Febr 2012 - Jun 2013

What we found after analysis

» 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

Conclusion

» 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

Let’s take a look at the System Profit Generation Capability

Methodology

» 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.

EXAMPLE

» 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$

Let’s analyze the Historical HDPE Volatility

P6 – HDPE March 2010- May 2013

0.75

0.54

= 0.75-0.54 = 28%

0.75

Summarizing

» 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

Another way to use Signals System

» 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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