13 April 2004 15:05 [Source: ICIS news]
Europe’s big polyolefins producers are gearing up for the launch later this year of polymers contracts on the London Metals Exchange (LME) and laying the ground for further commoditisation of the business.
Accepting reality, most producers want greater flexibility and see further opportunities to cut costs. Not all agree that future contracts are the best way of achieving this. However, increasingly it looks as though futures contracts will be playing a significant role in the market by this time next year.
The LME’s plans to launch polypropylene (PP) and linear low density polyethylene (lldPE) butene co-polymer contracts before the end of 2004 has raised the debate about whether paper trading and hedging mechanisms can be successfully deployed in chemicals where at first sight liquidity seems limited. Some producers are for and some against the concept. Converters worry about the impact on prices, while big polymer users like the automobile makers and major retailers are largely supportive wanting to be able to better manage their considerable exposure to polymer price fluctuations.
Everyone is concerned about the high price of oil and its impact down the chain. Producers still worry about feedstock and price volatility and their ability to continue to make money against the general downward trend of prices over time. Leading producers want to be able to hedge against their exposure in chemicals more efficiently and in much the same way some of them do in oil and oil products.
Not surprisingly, companies are playing their cards close to their chests although Insight has learned that at least one of the major players is re-organising in the market so that it has base marker polymer grades alongside its commodities and specialities businesses. The new grades are likely to have the name 'Alastian'. Pricing mechanisms, such as retroactive monthly pricing, used by this firm are expected to change before the end of this year. The new polymer grades would be those on which possible LME contracts might be based. Only some 2% of trades on the LME typically result in physical delivery but reference grades are needed – on which base prices can be set – and physical storage and delivery locations are required. (For the planned PP and PE contracts these are the Antwerp/Rotterdam area, Houston and Singapore with nearby Johor in Malaysia being a possible alternative.)
LME polymer contracts signal a major change for the sector as it accepts further commoditisation of PE and PP markets as a fact of life. Some producers are holding out and seeking to build closer customer relationships but they are battling what looks like an overwhelming trend. The big Kunstoffe plastics and rubber trade fair in Dusseldorf in October this year will bring the focus very much towards the new hedging mechanisms and what further commoditisation will mean. Whether companies reveal details of the expected major sales and marketing reorganisations then or beforehand remains to be seen.
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