LME plastics contracts gain momentum

11 June 2004 17:25  [Source: ICIS news]

It may be too early to say that the time has come for more extensive paper trading in plastics but the imminent launch by the London Metal Exchange (LME) of futures contracts for polypropylene (PP) and linear low density polyethylene (lldPE) heralds a new era for the industry. Producers, converters and end users, wanting to protect margins from market volatility as never before, are being driven to look hard at the options. The ability to use paper to hedge against market risks becomes more attractive by the day.

 

The LME launched yesterday (10 June) details of its planned polymers contracts and more will follow. Support for the contracts is difficult to gauge at present – producers, for instance, are not allowed to comment collectively on the LME’s plans and converters have been quiet. End users might be expected to welcome the option of forward trading another key element of costs but are adopting very much a wait and see approach.

 

The exchange is driving futures opportunities in polymers hard now in the run up to the launch of contracts before year-end. There is also growing interest and investment in the contracts among brokers active on the exchange. Given the fact that the ball is starting to roll fast, it would take all but total disinterest to stop it.

 

Undoubtedly the LME is in this for the long term. The exchange takes a long term view of all contracts launched and does not expect immediate take off but a ‘slow burn’ over months and years, according to director of operations Neil Banks. This can develop into significant business. On average, the paper market in metals is 20 times larger than the physical market but this level of trade requires the build up of confidence on all sides.

 

Industry remains concerned about excess volatility and the LME is well aware of that but there is no concrete evidence from years of trading of very different products that a futures market affects volatility either way, Banks says. The one thing paper trading of polymers will do is raise awareness of polymer prices and the factors influencing them.

 

The LME has an industry committee for each of the products traded on the exchange. In polymers, the committee includes producers, converters, traders and logistics providers so it is working to allay some deep–rooted fears. The exchange has been talking also to producers, converters and end users on a one-to-one basis over many months now and to a broader audience in roadshows, principally in the US.

 

Certainly, the contracts will only prove their worth with use and only trading will demonstrate the attractiveness of a more transparent benchmark prices for the grades of polymers concerned. All the LME is doing is making available hedging tools to as wide a range of interested parties as possible. Concern about the future (of futures) is natural and to be expected but there are strong forces driving change.

 

In most respects, polymers futures trading is a concept whose time has come and the interest generated is significant. Not surprisingly, research is ongoing now into what other contracts might be feasible, given that liquidity in the planned trading vehicles can be achieved. There is talk of possible contracts for low density polyethylene (ldPE), high density polyethylene (hdPE), bottle grade polyethylene terephthalate (PET) and polyvinyl chloride (PVC).

 

This industry tends to react negatively to new ideas. However, the status quo in polyolefins is being challenged daily and the pressures to adapt to new industry landscapes can only increase. The question is whether to go with the flow and make the most of it or step aside in the hope that the world itself might change.
By: Nigel Davis
+44 20 8652 3214



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