Hedging - Financial and Physical

Consumers can also negotiate with feedstock suppliers on upfront payments or payment terms under which they pay a higher price than the lowest market price at the trough, but pay lower prices when product prices spike. An interesting application of this is the potential for an ethane cracker operator to convert the economics of its cracker to those of a virtual naphtha cracker, by paying an integrated gas producer-processor a price for ethane indexed to naphtha-based ethylene production costs. 

Chemical companies that are part of integrated oil companies such as ExxonMobil, Shell, or BP have their own built-in hedges in the sense that the upstream business reaps profits from high feedstock costs. BASF s successful gas and petroleum business has similarly served as a hedge to its hydrocarbons-exposed chemical operations. 

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