LME looks to plastics futures

15 October 2003 17:13  [Source: ICIS news]

The European petrochemicals and polyolefins scene is changing markedly as producers are forced to address issue of logistics and marketing. Restructuring has dealt strong hands to (relatively) new players but above and beyond that the industry has been working hard in the face of significant raw material volatility and price pressure to do more to enhance competitiveness.

It is noteworthy now that concrete steps are being take to improve the pipeline network. Cost probably weights too heavily against a UK/Belgium ethylene link but elsewhere ethylene logistics have been significantly improved. Dow is expected at the end of this month to start using its new ethylene/propylene pipeline in Germany, joining the Schkopau and Stade sites. At the end of September, a Rotterdam link effectively completed the ethylene pipeline system that connects the Ruhr area in Germany with the Limburg region in the Netherlands and Antwerp in Belgium.

Beyond that it is much more widely acknowledged that something must be done to mitigate price and ultimately margin volatility. BP petrochemicals chief executive, Iain Conn, talked at the European Petrochemical Association (EPCA) meeting in September of moves to monthly ethylene pricing and of what might be needed to introduce greater flexibility into Europe’s polymers markets. There is hardly overwhelming support for his idea but on both fronts pressure for change has mounted.

Conn suggested that the proliferation of polymer grades was a barrier to greater European efficiency. The large number of grades, he said, has prevented the establishment of a limited number of marker prices for polymers, or prices that market players can trust. They could form the basis for risk management.

Risk management featured highly on his EPCA agenda and Conn mentioned then that moves were afoot to introduce plastics futures contracts onto the London Metal Exchange (LME). And LME chairman John Pizzey confirmed on Tuesday that the exchange believed futures contracts for plastics were deliverable. The LME has worked with leading producers and consumers and only a few outstanding issues need to be resolved, he said, before the possible launch of contracts for polypropylene (PP) and linear low-density polyethylene (lldPE) in the first half of next year.

Futures trading in polymers has been a long time coming but the LME has been encouraged by recent responses to the idea. Workable contract specifications apparently are close to being finalised. The LME says it wants to talk more widely now with producers and consumers to refine the approach. If the PP and lldPE contracts are launched successfully it is likely that other polyolefins contracts will be offered by the exchange in due course, it says.

The LME knows that plastics have much in common with metals. Both are global $120bn (Euro102bn) markets and the main categories of customers are similar. In many applications, plastics are being bought to replace metals. The LME’s delivery-based contract model is easily adapted for plastics futures, it says. Some of the big plastics consumers already use the exchange for hedging their metals trading risks.

A lot now has to do with education and with helping potential users understand what they might gain from futures trading. There have always been futures trading sceptics in chemicals and it will be difficult to convince many that older and more personal ways of business can prevail.

Details of the proposed PP and lldPE contracts will be released by the LME soon - firstly on its new plastics website: www.lmeplastics.com. The LME is also developing educational programmes to help give the plastics industry a broad understanding of its business of risk management.

If weak growth and raw material price volatility is to be a feature of petrochemicals and plastics in Europe for the next year or two, as players believe, then the pressure for change can only increase. And in markets challenged by producers from the Middle East and from central Europe on price and cost, the industry, and its customers, might be expected to push harder for better risk management.

By: Nigel Davis
+44 20 8652 3214

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