StoneX Group Inc. (SNEX) Earnings Call Transcript & Summary

Hello, and welcome, everyone. Thank you for taking the time to join us today for the Plastics in Focus, a deeper dive in plastics markets today. Before I introduce today's speakers, I will just go through a few brief housekeeping notes. At the bottom of your screen are several engagement tool icons that you could open and close throughout the session. All the engagement tools are resizable and movable. You can expand your slide area or maximize it full screen by clicking on the arrows in the top right corner. [Operator Instructions] And questions will be answered throughout the presentation and by the end of it. Should any questions go unanswered, the presenters will reach out to you by e-mail. You will also see a resource list where you can download content that we will cover throughout the presentation. You can find the link to the next virtual event on June 16. And this session is being recorded and will be sent out once it's compliance approved. So now I'll pass it over to Bruce Benefiel, Co-Director of Energy Trading at StoneX, to start today's event. Bruce, over to you.

Great. Thanks, Catherine. I appreciate that. Thanks, everyone, for joining us again today. It's a pleasure to have everyone here. As Catherine said, if you're not able to join now and you had registered, you will be receiving an e-mail in the coming days with the audio recording of the webinar. So that being said, here's a highlight, a list of who's speaking today and really what we're going to try to be covering. We know that maybe some of you had joined us 1.5 months back when we did an initial webinar, really talking about our risk management services in this plastic space, and what we're trying to do and what we're trying to accomplish. And today, we're going to take a little bit of a deeper dive and get more analytical and get into a little more of an outlook and look at data a little further with regards to the plastic space. So we did this last time and thought it would be pertinent to do it again. We wanted to show that we took a survey in 2021 of a select group of customers. And really, what we're just trying to highlight is the amount of commodity spend and how relevant plastics is in that space across a broad spectrum of commodity users. And so while it might not be as conventional given that it's not the tradable market such as corn and soybeans and crude oil and gold and FX, plastics is still a very large physical commodity spend. We're going to do a polling audience -- an audience polling question as we had done last time. And everybody will have the opportunity to submit. I'm going to give 10 seconds or so to let everybody have an opportunity. But we wanted to ask you what are your commodity procurement objectives as we dive into this further. We're going to give it a little bit of time here and then we'll see what the responses turn out to be. [Voting]

All right. So we've got some trickling in. It looks like budget protection is -- has got the lead so far, followed by volatility reduction. Not surprised by that. Very similar to what we saw last time. That takes me into my next point where we talk about business planning, budgeting, predictability, and why we're trying to look at this. When we did a survey, budget protection was indeed the #1 cause for need for having risk management in this space. Obviously, reducing volatility. And as we saw from 2020, at the beginning of COVID, into 2022, prices doubled and even nearly tripled in some cases in polyolefins. And so catastrophic price protection is definitely of importance. Also, market competitiveness, close by. And so all of these things are very important commodity procurement trends that we're going to talk about, we'll dive deeper into today as we go along. So really, the what, the why and what are we trying to do, why are we here today. And so not that it's necessarily such a new concept as some of you may have been experienced in swaps in the plastics space. I mean there is an external OTC market that does exist. It is quite opaque. And it has been somewhat very limited in the past. But what we've tried to do is try to create a product that fits our customers' needs to match the physical indexes that they're trading against. And so whether that be IHS or whether that be CDI, potentially other global markets, with indexes such as ICIS or Platts, or other markets and other regions, we wanted to be able to create a customizable product for volume, for time, for index to suit our customers' needs. And so over time, when we were looking at our customer base and talking to them, whether that be in the meat market, the dairy markets, soft commodities, ag commodities, we always continue to get a theme coming back to us that if we could find a way to manage or better help serve our customers with their packaging exposure, that we would have something, that we would have demand for such a product. And not necessarily that we just wanted to create a product just for trading, just for a swap for budget mechanism, like we spoke about earlier. But really create more market intelligence to give our customers more insight into what is happening in that market. Plastics being a derivative of the hydrocarbon market, they don't have the transparency and the market commentary that something like crude oil does or say, corn or soybeans or other more liquid commodities. And so our hope is that we're going to be able to provide more of an advisory service on top of a swap offering that allows our customer base to look at things as such and have a deeper look into it that they might have not been able to otherwise. And so here, we have various ways that we can look at helping you. And the other gentlemen that are going to speak today will definitely dive into these further. But we wanted just to give you an introduction as far as what our capabilities are and what we're looking to do, and then really bring that together, bring that home with a deeper dive into the markets and the outlook on what we believe and what we see and what those factors that are driving those respective markets. So that being said, I'm going to turn it over to Mr. Howard Rappaport. He's our Senior Adviser of Plastics at StoneX. And he is going to give us a business outlook for the plastics sector. Howard, take it away.

Thanks, Bruce. And I also want to welcome everybody to our webinar today. And as Bruce was indicating, we'll give you a little bit of an overview of what's going on in the market currently and what some of the near-term outlook looks like, just the general business environment. And then we're going to pull the curtain back a little more on how StoneX is taking a deeper dive into the analytics and some of the market dynamics and criteria. And translating that into how we can use that in an actionable way to help you manage your business. So let's go right in here and start to take a look at what's going on. This just gives you a quick illustration of the kind of environment that we're in right now. We basically took a look at the pricing over a 5-year period and looked at the various levels of price, and these are actual price levels. And took a percentage take on how the -- how long we remain at certain levels of price. And so the big takeaway here is, as many of you are experiencing every day, we are in a high-price environment. There's no question about that. And in some cases, painfully high, particularly in the case of polypropylene. But what it tells you is that, yes, we're in the upper echelons of price. And the sustainability of that is limited by the percentage down below here. So in other words, we're at a high price level. But the amount of time over this 5-year period that we are able to sustain that high level of price represents single-digits, less than 5% of the time. The other thing that's interesting is the higher the price, it also is an indicator that we're in a more volatile price environment. So prices are high. It won't last that long, but it will be volatile. Apropos, if you're watching the news, looking at the business information, just driving back and forth to your local gas station, obviously, we've been in an environment where oil and natural gas prices are at very high levels. And what's interesting is if you take a look at the impact that crude oil prices can have on GDP growth, these are rough estimates. But you can just rule of thumb. Every $10 to $15 per barrel increase in the price of crude oil, it translates roughly to almost 0.5% decrease in GDP. And obviously, the numbers just came out today. First quarter GDP in the U.S. is down 1.4%. First time that we've seen a negative number like that since the beginning of COVID. And obviously, at the same time, we've seen a big run-up in crude oil. So there is a relationship. Higher crude oil translates to slower GDP growth. So let's just paint a picture here of the inflationary environment that we've been in. Obviously, we have seen upwards of 7% to 9% in the recent months of consumer price index increases. And I hate to admit it, but it's been almost 40 years since we've seen this level of increase. And I was around in 1982 and remember what that was like, unfortunately. But it's -- we're in a steep incline right here for consumer prices. And there's a lot of factors that are contributing to that: the tight labor market, people are coming and going in and out of the workforce, wages are increasing, which translates to higher base costs for most businesses. You've got the recent 0 COVID policy in China, which most recently shut down the entire city of Shanghai for a period of time. Of course, the ongoing conflict between Russia and the Ukraine, and energy prices that have been on the rise. And so the question that keeps coming up is what can the government do to respond to this? And of course, we're seeing a precipitous rise in rates. The Fed is starting to jack up rates. But what else can they do to slow down the increase. Of course, they've been on a spending spree. And so a reduction in government spending, rate increases are all tools that the government can use to slow it down. But also, in addition to consumer prices, you go back in the supply chain, obviously, and look at producer prices, and they're soaring right now. And last month, in March, we saw an 11.2% increase from last year at the same time. And that was the largest increment increase on record, 11.2%. So many of you who are in the manufacturing sector know full well that the prices of all of your supply items and raw materials have been on a steep incline over the past several months. Now how does this translate into the plastics sector? Well, obviously, all of this can influence plastic costs and prices. So starting on the energy side. As many of you are aware, we're downstream derivatives of crude oil and natural gas for the most part. So as the energy prices rise, that puts upward pressure on petrochemical feedstocks. And in the case of polyolefins, which is basically polyethylene and polypropylene, it puts upward cost pressure on ethylene and propylene, which translates into higher cost to produce the resin or the pellets. And then in addition to that, the producers, the chemical companies who produce these resins also have high utility builds, because they have these major manufacturing sites to run and they've got boilers to run and they've got compressors and they've got conveying equipment. So they're utilizing a lot of hydrocarbons in their own right just to run the facilities. And then in addition to that, it's part of the feedstock formula for the monomers and petrochemicals to make the plastics. In addition to that, the higher crude oil prices and refined products translate into elevated freight costs for everything from railcars to trucks. And then seagoing containers have seen a huge spike in cost going back and forth, particularly to Asia. So it's been a very high cost environment over the past 12 to 18 months. And producers in the U.S. still have some leverage to pass those higher costs along to their customers, the fabricators, conveyors and converters who buy pellets. And then those of you who are in the packaging procurement business are seeing those passed along to you in your packaging costs. However, there is some light at the end of the tunnel there on the horizon. We do have some new capacity coming online in North America for both polyethylene and polypropylene in the second half of this year, which could start to moderate some of that leverage that the producers have had. By the same token, you've got some economic risks. Obviously, with the first quarter, negative GDP, stagflation, that's a term I haven't heard for decades, basically a slowing economy with higher prices, which could lead to a potential recession. And then the other aspect is demand destruction. Will the slowing economy translate into some demand destruction, which, of course, could free up available capacity. On the energy side, just to give you a sense of where we're going here, there is some recovery. We do see production for crude oil in the U.S. on the increase. We've got the red circle here, was the low point during the height of the pandemic. But you can see the rig count for nat gas and crude oil starting to rise. And they're estimating -- the EIA is estimating somewhere between 11 million and 12 million barrels per day on average production for crude oil throughout the rest of this year. Most recently, we saw a number on average of about 11.8 million, close to 12 million barrels per day. So we're on the recovery. But there still is quite a ways to go to get back to where we were a number of years ago with the really high rig count that we've seen. Inventory wise, this is just another indicator of why prices are high. Crude oil inventories are basically below the 5-year range here in the blue line for 2022. So we're still -- we still got a ways to go before we get up to a comfortable level of crude oil inventory in the U.S. And we're in a similar but not as severe situation with a natural gas. We're at the low end of that 5-year range, the blue line over here. So we're still not in a very comfortable position. Of course, natural gas prices have been touching $6, $7, $8 per million BTU, which is considered pretty high compared to history. And then just to give you an order of magnitude. If you go back just a year ago, to the first quarter of 2021, we're basically in the 50s for crude oil. And now we're banging around against $100 a barrel. So essentially, we're talking about oil prices that have doubled in the past year. So a lot of upward pressure on cash costs, translating into price pressure. The supply chain continue to see issues with the entire supply chain from a logistics standpoint, a lot of delays, disruptions, deliveries. The plastics industry hasn't been in this kind of a state in decades. One thing in particular, which is important to keep an eye on, are empty hopper cars. These are the 4-compartment hopper cars that are filled with pellets that go between the resin producers and the fabricator converter community. Their -- the turnaround times for empty hopper cars is extremely high. And if the resin producer companies, the chemical companies don't have empty hopper cars, that's their packaging to fill. Then they, may from time to time, have to slow production rates in order to -- if they're waiting on empty cars to refill. In addition to that, there are hopper cars that are jammed up at the packaging facilities, repackaging facilities down in Houston, where they put it in 25 kilo bags and super sacks to go export. So there's a lot of traffic jam down there with hopper cars, and that has to clear up. You also have the other issues for other manufacturing operations, things like the computer chip shortage, which is having a big impact on vehicle production. I just saw something this weekend with the new announcement of the Ford F-150 Lightning. They're talking about 2,000 to 3,000 chips in every vehicle when it's all said and done. So the demand and the need for chips for things like automobiles and other more sophisticated manufacturing operations is causing strain. And then the shortages of labor, raw materials, and then, of course, the geopolitics and environmental and social responsibilities that the industry also has to pay attention to. There's a lot on the plate, tremendous amount on the plate. The Federal Reserve in New York did recently take a look at the supply chain. And there are some signs that we may have reached a peak of -- a pain peak, I'll say, in the supply chain pressure. So potential good news on the horizon. There's -- you see a little hook on the end of this line here, with the arrows pointing to. And there is a chance that we might be at the high end of the range here and maybe turning the corner potentially over the next several months. So let's keep our fingers crossed that we're going to start heading in the right direction real soon. Again, on the geopolitical side, in the plastics markets in particular, we have additional pressures because of the environmental initiatives, sustainability, recyclability, trying to create a circular environment for single-use packaging, lots and lots of environmental issues and initiatives in the plastics space. And then you also have the politics country to country around some of these new situations, including the -- we talked about the semiconductors. But as we go to transition over to a more electrified environment out there, you've got some of these minerals and battery components that have to be supplied from various countries around the world, and of course, the continuing and ongoing strife between Russia and Ukraine, which is creating additional uncertainty. What does all this mean, the -- in the near term and for the foreseeable future? We're going to see continued pressure on prices for now and continued inflationary pressure as well. So let's just take a quick rundown, a couple of quick bullets before we end this segment. What's happening out there right now that's impacting polypropylene, polyethylene? Just a quick rundown. Nat gas prices remain elevated, around $6 to $7 per million BTU. We've seen it touch $8 recently. Inventories are low, just to reiterate what we showed you earlier on the graphic. At the low end of the 5-year average. Crude oil is above $100 a barrel. Propane, which is an important component, because propane gets converted to propylene, which gets converted to polypropylene, is hovering around $1.20 a gallon, which is a high number. We've had some force majeure events in the industry. Some of the major suppliers, LyondellBasell, INEOS, Phillips 66. In addition to that, the market's been pretty tight and some producers have expressed the desire to increase margins. And we'll talk more about margins a little later. But both ExxonMobil and Total have announced the desire to increase their margins as of May 1. So look for potential price increase initiatives there. LyondellBasell had previously announced their intent to increase margins an additional $0.04, and that was last month. So they may try again in May. So there's a continuing short-term pressure for higher prices there. Polyethylene, ethane, which becomes ethylene, which becomes polyethylene. Ethane prices at $0.40 a gallon or -- on the high side. And nat gas prices, as I mentioned, are relatively high. And they'll probably be over $5 a million BTU I would expect for the rest of this year. The rail congestion problems are an issue. And that's causing shipment delays and potential slowdowns of the plant operating rates. If they can't get empty cars back fast enough to fill them, refill them and reship them. Also, impacts the export market, particularly if you have new capacity on the horizon later this year. And the repackaging facilities in the Houston area are at max capacity and have logistics headaches. We also have some issues with hexene, which is what we call a comonomer that mixes with ethylene and certain products, one of which is a hexene linear low density film product. And there's been some tightness in the hexene area. That's impacting the supply of this particular film product and linear low. And the industry is running as hard as they can run. And the indicators are that March was a record month for production and sales in polyethylene. So the industry is trying to run as hard as it can. So that's it for the near-term outlook on the market. And I'm going to turn it over to Cassie Adolf and Alex Hodes to take a little deeper dive and look at the analytics in how we formulate some of our strategic recommendations for our customers.

Great. Thank you so much, Howard. We're going to actually kick off this section with another audience poll question, so this kind of flows nicely from what Howard's topics were. But asking the audience here, what's your biggest concern about your plastics input? Is it price fluctuations? Is it reliable sourcing and shortages? Is it passing on costs to your customers? Or is it sustainability and environmental concerns? And we'll give it a second for everyone to respond here. [Voting]

Okay. And we're seeing price fluctuations. So Howard touched on supply chain logistics, which continue to be an issue, started with the pandemic and continue as we kind of transition out of it. Sustainability and environmental concerns as well, given the rise in public perception, given new industry innovations and government requirements. But even as we ask our customers today, price fluctuations, pointedly rising prices across resins, across, really, all commodities is the biggest concern for our customers. And that is kind of -- the question our customers come to us is, how can we be proactive about this? We know we're in a really high price environment. But what can we do now to plan ahead? As Bruce mentioned earlier, this is kind of a recap of the same slide he had. But just to reiterate, the most important goals and objectives when it comes to procurement for our customers is protecting budget. It's reducing price of volatility as well as also managing catastrophic price risk. And here, we're really looking at price certainty. So we're not looking to call the highs or the lows of the market. We want to protect our margins. And the objective here is really to control price. And at StoneX, we help our customers manage exposure across pretty much every major commodity, notably energy, notably ags and dairy. And typically, these are easier to manage, historically, because we have ways to hedge them. They're more liquid, that the markets are more transparent. So we'd like to present that kind of same opportunity now in the resins space, in the plastics space with our swaps contracts. We'd like to allow our customers to make more informed decisions now with our market gauge tools and our hedge plans, which we're going to show you today. So Alex is going to jump on in a second. But I just wanted to kind of set the foundation of the building blocks to manage risk. And while we have a lot of senior experts on the call today and while I'm sure there are a lot of them out in the audience as well, we all can, I think, agree that, at the end of the day, no one can predict price. If we could predict price, we probably wouldn't be here on this webinar. We'd be sipping some piña coladas on our yachts in the Caribbean, but that is not the case. So how can we make more informed decisions regarding the market? And we built this market gauge for plastics to really give our clients a quick snapshot of all those factors impacting the market and give them kind of a concise view on the market direction. So we're helping our customers first make the most qualified decisions to manage the budget, to manage that market volatility. And it really starts with 2 buckets, and that's quantitative variables and that's qualitative variables. Quantitative being margin analytics, being price analytics. So we're looking at the profitability of resin producers. We're looking at energy feedstock prices and seasonality. And then on the qualitative, we're looking at fundamental factors, which are a little bit harder to quantify. So supply and demand. And then also economic factors, so GDP growth geopolitical factors, anything that is really driving world economies. And we're taking those variables and condensing them into market gauges to really guide the market direction. Is it very bearish? Is it bearish? Is it flat? Is it bullish or very bullish? Individually, what are those market gauges saying? And collectively, what does that show kind of for market direction? So I'm going to pass it to Alex to take a little bit of deeper dive into those and really tell us a little bit more about what the market is doing with these variables. And then I'm going to jump back on and talk a little bit about an action plan. So over to you, Alex.

Thanks, Cassie. And here is kind of just an outline of how we approach the resins market. These are some of the factors that really go into our models and what we try and quantify. And kind of take those quantitative factors and qualitative factors and come up with an action plan or a direction from those factors. So we'll discuss each one of those factors individually and kind of some features that are going on in the markets specifically. The main drivers are really going to be economic factors, energy prices, fundamentals, petrochemical margins and then the resin price, and where it sits kind of in a historical manner, a trending manner and seasonality manner. So first off, we'll discuss economic growth. Howard recently alluded to the numbers of GDP are reducing. And so really, when we look at economic growth, whether it's accelerating or contracting, that's going to drive prices of polypropylene or -- and high-density polyethylene. Recently, we've been seeing the weekly economic index actually tends to lead where real GDP growth, and that correlates highly with plastics prices. It's down 11% in April from Q1 of 2022. So we did see that contractionary number on Q1 GDP, so we could see an even weaker number coming up in April. GDP growth. There's a bunch of various factors that are going into what is affecting GDP growth. Howard kind of discussed these. There are supply chain factors, inflationary pressures that are hurting demand. In addition to that, there's tightening monetary policy and kind of a removal of fiscal stimulus that has been in the market for the past few years. That's kind of been a support of demand. In addition to that, the yield curve inverted for the first time since 2019. And that is kind of a signal that there could be a heightened possibility of a recession. All these factors, in addition to the innovation of Ukraine by Russia and COVID lockdowns in China, could put some downward pressure on broad demand. And so those factors all together are kind of weighing down -- could weigh down the plastics market in the future. The next step is kind of looking at energy prices. And we looked at these -- or we discussed these a little bit. It's kind of the same story across most energy products. And what we're showing here is the StoneX plastics index, which is basically a combination of a lot of crude and refined products in addition to NGLs, olefins and polyolefins that are really going into that kind of spillover into the polyolefins market, as Howard outlined, was the fact that those upstream prices are really going to have to spill downstream eventually for the polypropylene and polyethylene producers to kind of make a profit on there. So currently, everything is historically high. We're in the 90th percentile in the plastics index. Fundamentals across most petroleum and energy products are at undersupply. And there was kind of a significant increase in demand. So we are in an undersupplied market in almost all of the energy products. Energy prices do also tend to strengthen in the fall. So there is a little bit of that seasonality. That could go into prices rising even further. And how those high prices affect polyolefins prices are that high prices spill over into polypropylene and polyethylene prices. So you can see here that prices are just extremely high so that's been supportive of polyolefins prices recently. And then fundamentals, we'll discuss a little bit about this. First off, polypropylene fundamentals. There's been a force majeure of several plants, and it's led to a tightening of supplies, which supported polypropylene price increases. In March, it jumped about $0.10 per pound, and it was estimated to kind of remain flat at that time. But those have kind of put more of a pinch in the market overall. The force majeure accounts for about 9% of all polypropylene capacity in North America. In addition to that, there's logistical issues that have held back some exports that have kind of helped prevent supplies from drawing down too rapidly, but still, we're tightening in polypropylene fundamentals, and domestic demand has kind of slowed down. So polypropylene, overall, is -- it's a tight market, but there's additional polypropylene production capacity coming online in the summer and throughout -- till the end of 2022 that could kind of support things, but temporarily, we're in a very tight market. High density polyethylene fundamentals are slightly less tight, but with railcars -- railcar shortages [ have ] kind of been an issue of moving high-density polyethylene products. Supplies are full and warehouses are relatively full. So we've seen kind of inventories build a little bit more recently. And additional production capacity is going to be brought on in -- throughout 2022. That's going to substantially open up the market and make it a more well supplied market in the rest of 2022. However, Howard discussed this a little bit, was that we've hit record high demand levels, specifically for high-density polyethylene products. So there is still that demand there in high-density polyethylene, but the supply response has been pretty healthy. And lastly, we'll discuss petrochemical margins. So are the resin producers profitable? Yes, they have been extremely profitable recently. It's been -- polypropylene margins are historically and seasonally high. You can see in the chart on the left. This is kind of a seasonal breakdown of where we're at. We are above both of those, the 3-year and the 5-year seasonal average significantly. And the force majeure on the 2 facilities that account for 9% of polypropylene capacity are going to increase these margins temporarily. So one thing that polypropylene margins have led to, historically in the past, is volatile polypropylene prices. So when margins are extremely high, these producers are going to ramp up their production as much as they possibly can, which eventually leads to an oversupply. So that kind of response will allow for big swings either one direction or the other. So that's -- in the upcoming months, we are expecting to see an increase in volatility. However, in Q4 of 2022, we're going to see more polypropylene production capacity that might bring these margins down. High-density polyethylene margins, they're seasonally high, but historically, they're not as high. You can see in the image on the left, there's kind of a seasonal trend that the margins follow, and we can see that we're just in that increasing margin area. However, the fact -- and this recent strength was due to ethylene prices that had been weakening. But the recent moves in natural gas are going to most likely spill over into ethylene. And in addition, these margins could be -- could start shrinking due to the additional high-density polyethylene capacity that's going to be brought on in Q2 and Q3 of 2022, which will account for almost a 15% increase in production capacity. So there's kind of a similar story between polypropylene and high-density polyethylene, in the fact that there's a lot more build-outs that are going to occur in the upcoming months. And that could kind of help the supply and demand dynamics of both of those products. So here, what we do here is essentially look at each of those 4 factors we discussed and combine them together and to come out with one kind of a gauge that shows us our opinion of the market. So for polypropylene market gauge, we're slightly above flat, trending toward the bullish gauge region. And this is really -- some of the factors that are going into it is prices are historically elevated along with margins. So some -- when higher margins -- when there are higher margins, it tends to lead to more volatile price periods. And it usually tends to lead to the downside as more producers start to ramp up their production. However, that's kind of fighting with the force majeure that has trimmed some of the production capacity of polypropylene. So until that -- until those production issues are solved, we could see a little bit of tightness in the upcoming months. However, when the additional capacity comes online at the end of Q2, it will ultimately put downward pressure on polypropylene prices in late May and early June. And in addition to that, we can see some economic weakness spill over to demand for polypropylene products, and that will ultimately kind of start bringing down polypropylene prices. Overall, we believe that prices in June and July could be an opportune buying time as prices start to retreat. But for May and the -- into the end of May, we'll really see the tightness from the force majeure on those plants kind of spill over to polypropylene prices and expect to see a slight increase there. And next, this is just combining all of the factors that are going into high-density polyethylene outlook or into high density polyethylene market. Prices for polyethylene are elevated as well. But they're not as elevated as polypropylene prices are, so they could have some room, more room to the upside as natural gas prices have been spiking recently. Inventories have built. But some of the railcars available are forcing some polyethylene capacity to slow down and shut down. However, long term, we're going to see a massive amount of polyethylene capacity be brought online. And so we could see a brief spike in prices in April and May due to the energy prices kind of supporting the market. But it should not last long as kind of fundamentals and the slowing economy will bring down those prices. So kind of a similar outlook on both of these products, and they are reflected in those summary gauges of just a flat to slightly bullish outlook. So now we're going to hand it back off to Cassie to kind of discuss what the action plan would be after seeing what these gauges are kind of telling us and what the upcoming market is expected. Over to you, Cassie.

Thanks, Alex. So just we got one more poll question for the audience before we jump into that one. And this is, which statement most closely describes your plastics procurement strategy? So are you getting price fluctuations passed on to you, and you're just floating with the market? Do you have a set procurement strategy to mitigate price risk? Do you have expert -- do you have experience in these markets or have access to someone like Howard that might be able to weigh in on fundamental drivers and seasonality? Or does your supplier offer you fixed pricing? So it's probably a range of these. But which one is most, I guess, closely describing what your strategy would be? [Voting]

Okay. And it says that you buy plastics or packaging from your supplier who passes on the cost fluctuations to you. And for our customers, especially just seeing and living through these high-price environments, black swan events like the pandemic, like the Russia conflict, it really teaches you the importance of having to manage the price risk to protect and sustain your business profit. So let's jump in here and look to see what an action plan would look like. This is an example action plan. And we strive to customize these for each and every one of our customers based on their procurement objectives and their risk tolerances. What Alex kind of went over today was that market gauge, which helps to gain us a perspective on the market. With the action plan, with the hedge plan, we're taking it a step further. So we're trying to develop a more of a methodical strategy for purchasing, for layering in purchases. And the idea behind these we really want them to be defendable and justifiable to management. It's really important that you get your senior executives to buy in on these so that you can act quickly when marketing -- when market opportunities present themselves. Too often we kind of see that procurement professionals are kind of chasing their senior executives in order to get an approval on a hedge and the time that it takes to really plan that meeting, and market opportunity passes. So it's really important to have a methodical plan laid out and that it's agreed upon by senior management in advance. So how do we set an action plan? And there's really 4 components here. That's budget, that's value, that's time and that's tools. So the first one, budget, as we talked about earlier in the presentation, we know how important it is for our clients to protect their budgets. We suggest you layer in some price targets at budget level. Maybe at budget level, minus 5%, minus 10% as a beginning. We also encourage you to look at values, particularly historic value. And how do we measure historic value? If you look over here on the right-hand side, there's an HDPE IHS price matrix. So what we're doing here is we're taking 4 years of historical prices, daily historical prices, so roughly 1,000 data points. And we weight them to the most recent year. We adjust them for inflation. That's why you see here that prices look like they hit a high of and $1.19 in reality, at $1.07 because these are adjusted for inflation. And inflation is really driving up these prices by about 10% across the board. And then we distribute the prices over 10 deciles. So in the very lowest tier there, you see the mean to 10%. That's going to be the lowest 10% of prices. And then if you go all the way up to the 90 max decile, that's the highest 10% of prices. So we're distributing the prices over those 10 deciles. Everything under the 50th decile and lower is industry-best practice for good historic value. And that's where you want to start layering in coverage. So that is value. We also encourage you to have some time triggers in place. What happens when you don't have the opportunity to buy budget or to buy value, which is probably what most of you face this year. You're going to want to set some time targets. Maybe that's based on seasonal lows. Maybe that's based on just a little bit of a coverage prior to a quarter. And then the final factor here would be tools and discretion. So in most commodity environments, we have the ability to use optionality as kind of an insurance tool. I know that's not as common in the resins market. But we also want to make sure there's a little bit more of discretion in terms of the hedge plan so that it's not -- we want the methodical price, some time triggers. But we also want to just leave a little bit open for discretion because you do have these extreme market environments. So as far as the hedge plan goes, on the bottom, the hedge action plan, if you can go out a year, which is typical as what we see in the industry, you're going to want to layer out coverage by quarters. And the max hedge percentage for each quarter really scales down as you go further out. So here, we see quarter 2, which would be -- Jan, Feb, March would be quarter 1. April, May, June would be quarter 2, or we could do this on your fiscal year. But for quarter 2, you have a max hedge percentage of about 75%. And as you go out further in the year, quarter 3, quarter 4, that's going to ratchet down to 50% or 25% max hedge percentage. And really what you're doing is you're comparing the current price as you go along a year in advance to, say, value targets. So we have a value target here set at the 50th decile. I think that's at $1.02. If you're in that value, you might want to layer off a 25% purchase, right? And then as you get deeper into value, at that 40th decile, another 25%. As you can see, prices haven't hit that 30th decile mark so you haven't layered in another 25%. So for -- say, for quarter 2, you might only have 50% hedged right now. In the case that you can't hit those budget or value triggers, you're going to want to see -- look at a time trigger. So a little bit of a coverage before a quarter. In this case, we set it for March, but you could also set that based on seasonality. So that's the idea of how we would really develop a specific hedge or action plan for your specific company. We'll take a look here, too, at polypropylene here. You can see polypropylene prices have been an upward trajectory, as all of you know. And so right now, prices are not in value. They're really in the 80th to 90th decile of historical prices over the last year. In this case, you're going to be hitting more time targets. But that's really what we'd like to sit down and do for each and every company. That's kind of this -- one of the service offerings that we do. We know it's not comfortable at first using financial tools. Even if you're using them in other commodities, we don't want you to jump heads in and do 100% or 80% of your volumes. We really recommend you start with maybe a pilot program with pilot volume. So maybe you start 15% to 25% of your total volumes. And then you refine and adjust this program as you ramp up in the future and as you get more comfortable. And as I mentioned, this is specifically customized for your company. We know everything starts with education, especially education on a senior executive level. And StoneX can be your provider for all facets of this implementation. So whether that's market expertise, whether that's price transparency, whether that's implementation of a structured program, whether that's education, StoneX can really help you in any one of those facets customized to your company. So I'm going to pass it back to Howard to talk a little bit more about our services in that arena. And everyone, thank you for joining today. And I really appreciate you having me on today.

Wow. Thanks, Cassie. That's quite a bit of material, and Alex as well, to get into in a short amount of time here. And obviously, as we move forward with the program, we'd like to have more one-on-one discussions with our customers and prospect customers about how we can help them specifically with their business needs. So just to recap, as we close out and get into the Q&A, what kind of services do we have to offer? It's basically 3 buckets here: advisory services, which range from just basic education about the plastics markets and supply chains, how the products are manufactured and how the molecules fit together, going from energy, hydrocarbons, all the way to pellets and finished products. We can also talk specifically with companies about their procurement and purchasing practices, contract terms and conditions. Are they getting the best bang for their buck in terms of buying plastic packaging and related products. Some of you may be doing should-cost modeling for various plastic packaging applications. And we can help you figure the some of that out as well. And then, of course, discussions around strategies pertaining to sustainability, recyclability, environmental concerns, what are some of the best practices and best product choices and selections you can make if you're looking out ahead of the circularity and sustainability issues for your business. In addition, we're publishing content every month and it's a -- we have a biweekly polyolefins update, comes out every 2 weeks. And we're talking about current market conditions, what's happening out there, some of our thoughts and opinions on market drivers, price direction, near-term outlooks, looking at cash costs, and of course, the supply chain dynamics as you've seen us go through today. And then finally, as Bruce alluded to at the beginning, we've -- StoneX created some financial swaps that would be pertinent for buyers of either plastic resins or plastic packaging, anything that -- anything related to a plastics spend. We're starting off in the polyolefins area, so polyethylene, polypropylene. We have over-the-counter swaps. And those are tied into the current postings for IHS Markit, which is now in transition. IHS Markit, some of it's going to S&P Global and some of it's going to Dow Jones. And you can read about that online. And then Chem Data or CDI, which is part of the ICIS organization, which would then allow you to have some opportunities to create a fixed price and a predictable margin for your business. So basically, it's a comprehensive package. And it's a lot of moving parts here. But basically, we're providing a comprehensive model that's based on education, information, analytics, and then actionable -- taking all that information and data and creating an actionable plan to help you manage your business with all the basic tools and information you need, in addition to being able to lock in with some fixed cost swaps -- some fixed price swaps that would help you manage your budget. Also, you can sign up for the service that we offer, the biweekly polyolefins update. And we have a marketing landing page where you can -- for $100 a month, you can get this service every 2 weeks. That tells you what's going on in the marketplace. But I also believe, at this point, we have a special where you can sign up for a complementary time frame. And here's just a snapshot of one of the older editions, what it looks like, just brief updates, polyethylene, polypropylene. So let's stop the commentary there, and we can open it up for some Q&A. Here's the list of the players today and our glamor pictures. So I'll let Kathryn Ziegler Come back on and work us through the Q&A portion.

Thank you very much. Great presentation, you guys. It's always informative. Even being on the team, I love hearing what you -- how you speak on it all.

So let's go to the questions. Our first question was from Matt. And he's asking, are the force majeure events due to lack of raw materials? or supply chain constraints? Howard, do you want to take that one?

Yes. Yes, certainly. There's no one answer for the force majeure announcements. And it does range from polypropylene and polyethylene. Essentially, what happened as a -- broadly, I could say that many of the production facilities in the Gulf Coast, Texas, Louisiana Gulf Coast were postponing maintenance as long as possible during 2021. And there was a very heavy schedule for plant turnarounds and maintenance and so forth early this year. And so that's one element. One company -- it just escapes me right now. One company had a mechanical failure. A gearbox went out at one of their sites and had to declare a force majeure. Another company was having difficulty with some of the additives that they use in some of their products, which created a force majeure situation for some of their products. So it's no one thing. It's not lack of -- it's not generally from lack of raw material or feedstock, the ethylene or the propylene monomer. It's more related to just plain old maintenance issues and unexpected downtime that's accumulated in the beginning of this year.

Thank you. That's a great answer. Bruce, thank you so much for your question. Can you touch on the exercise tax -- sorry, I might be reading it wrong, that goes into effect July 1. And I also see you on there, Bruce, as far as the subscription. We'll make sure to get you set up on that. Howard, do you want to take that question though on the tax that's going into effect on July 1?

Yes, yes. Thanks for asking about that. I guess for those of you who may or may not be aware, I mean, obviously, there are a number of government initiatives that are in play against the single-use plastic applications. And I think the one that you're referring to, Bruce, is the Reduce Act that was introduced by Senator Whitehouse here in the U.S. And it's a -- the plan is to create an excise tax or usage tax for virgin resin. And beginning this year, it would add $0.10 a pound to virgin resin, and then transition up to $0.15 a pound in 2023 and then come to a crescendo of $0.20 a pound in 2024. Now as far as I know, and forgive me, I'm not totally up to speed on the current status, but this was introduced last fall by Senator Whitehouse. I'm not 100% sure of the -- what the implementation plan is. But let's just -- and we can maybe talk one-on-one off-line about some more of the details. But let's just put it this way. $0.10 a pound on top of where we already are in terms of these elevated price levels, like we're showing you in the presentation, that's -- I mean, it's basically -- I would call that a tax on everything. Any kind of packaging that incorporates virgin plastics to any degree is going to be hit by this. And it could ripple through to other areas as well. So this is an area of concern, and it is significant and could definitely ripple through the entire industry. So anyway, maybe we can talk about that individually off-line. But I believe that's what the nature of the question was about.

Thank you, Howard. Another question came in. Can you describe why railcar shortages are such an issue for the market? Is it expected to last much longer?

Yes. I'll take that one, too. Yes. I mean, it is an issue. And it is something to pay attention to. And there are ways to track railcar movements through the U.S. rail providers, the major railroads and the associations that track railcar movements. That is a real issue for the industry. There's a finite number of these hopper cars that are available. And the problem, the challenge that the industry has is just like all the other businesses are in need of labor and raw materials, so goes the railcar manufacturing business as well. So there's been a slowdown. You're talking about metal -- you have these very large hopper cars that hold 200,000 pounds. There are 4 compartments. And they need these -- they need large metal fabrication shops to put these things together. So there's been a little bit of a bottleneck in terms of labor and raw materials to make the new railcars. And in addition to that, the shops are overwhelmed because, as we alluded to earlier, there's new capacity coming online in the U.S. for both polyethylene and polypropylene. And those -- that new capacity requires additional railcars to be -- to use for those operations. So there are orders in the pipeline for thousands of additional railcars that the industry is going to need over the next year to 18 months as the new capacity comes online. And then some of the old railcars also need to get replaced with new railcars. So it is a bottleneck. It is an issue. And it's probably going to persist throughout the rest of this year. So hopefully, over time, we get the turnarounds -- the empty car turnarounds, the reduction in the amount of turnaround time and a reduction in the bottleneck for manufacturing new railcars. And hopefully, this will -- it'll fix itself over time. But there really is no quick fix. This is something that's probably going to be with us for probably the balance of this year.

Thank you. All right, another question from Lilian. Do you think that polypropylene prices will stabilize back to where they were ahead of the pandemic?

Well, I presume, when you're asking that, you're asking if they're going to come back down to pre-pandemic levels, I guess. And the answer is that -- and if you looked one of those early slides, we -- it's very hard to sustain this extremely high price level for an extended period of time. And I guess the answer is, eventually, we will probably get there. But then again, you also have to look at those feedstock factors and the energy costs. And so pre-pandemic, we were at $50 a barrel for oil. We're at $100 and also, the cost of ethane, propane, nat gas and all the other components. So you have to see it -- the entire profile for the hydrocarbons going into the production process have to come down along with the supply-demand factors that are associated with it. So my -- I guess the answer is yes. Eventually, we'll get there. The $100 question is when. But I don't see us getting to pre-pandemic levels anytime soon, especially not for the balance of this year and in the first part of next year. It's going to take a lot more downward pressure and feedstock cost reductions to get us there. And that's probably not until the first half of next year.

Great. We have Bruce. Yes, for sure, on the subscription, so much value in that subscription. We'll be happy to get you set up on that and really encourage everyone on here to follow up with that 14-day trial. It's just jam packed with so much information on these. They know -- these guys know what they're doing, so. And to a question, Brett says, sweet guitar in the background. Is that a Martin D-28, Howard? And then Lilian asks, will the issue of the pandemic and the war delay sustainability in companies?

Sorry about that. Yes, it is -- that is a Martin. And actually, I think it's 35. But I forgot the rest of the question. I was -- you caught me off guard.

Sorry. I tripped you up with the guitar, right?

That's right.

So will the issue of the pandemic and the war delay sustainability? So the progression with sustainability making a move in the plastics industry, do you feel that, that will be pushed back with everything else happening?

I'd like to think so that maybe the industry would get a little more breathing room with all the other pandemonium going on in the global environment. But I -- unfortunately, there's so much political pressure and momentum behind these environmental initiatives, between the U.S. government and even the UN. And Europe is also seeing this -- Europe has also got a lot of these same initiatives going into the mix. It's -- unfortunately, I don't think it's going to slow down. And the -- that these are serious issues for the industry, #1, from just simply from a consumption standpoint, a demand destruction standpoint. But in addition to that, as we were talking about earlier, when you're talking about $0.10, $0.05, $0.10, $0.20 a pound of a surcharge or tax, that's a big add-on. And of course, the resin producers are going to start passing that right along to their fabricator converter customers, who, again, are going to pass that right along to their packaging consumers. And it's just an additional recipe for more inflation and higher costs, unfortunately.

All right. Great. We will wrap up here shortly, Howard. That -- these have been fantastic answers. And we really appreciate you all coming out with questions. It's just -- that where I feel like real education comes from. Could you comment on a couple of the major indices from which the financial swaps are available? Is the StoneX index shown on the chart on Page 31 of the deck? Is that one of them? So I don't know. Howard, is that you or that might be Cassie or Bruce? Commenting on a couple of the major indices for which financial swaps are available. Is the StoneX index shown on chart -- on Page 31 of the deck, is that one of the indices?

Well, Bruce may want to chime in. But the index -- the indices that we're using for the swaps, we have 2 available right now. One is IHS Markit and the other is CDI, Chem Data. Those are the 2 major publications that post contract pricing indices in the North American market. So those are -- the current swaps are based on those 2 indices, those 2 publications.

Great. And then one last question, and then we will close out. The replay will be available in a few days that -- once compliance approves it. But is there any information on the polypropylene prices from the Far East and Saudi Arabia?

We certainly have some access to some of those numbers. And if you'd like to talk one-on-one off-line, we could probably provide you some insights into those prices compared to this -- the North American region for sure.

Absolutely. Always happy to customize and bring in that information that is requested. That's always something that we can customize. So thank you again, presenters, for presenting. You did a great job. And thank you, Howard, for answering all those questions. Again, a replay will be out shortly. Please check out the 14-day trial. I think that you're really going to love it. And we will be back here again on June 16 with another webinar updating on prices and taking another view at plastics, the plastics industry. So thank you so much for being with us, and we hope to see you next time.