Plastics futures gain further ground

15 July 2004 18:53  [Source: ICIS news]

Support for polyethylene (PE) and polypropylene (PP) futures trading is growing as the London metal Exchange (LME) prepares to launch contracts later this year.


Floor members of the exchange have begun to commit resources to the plastics business as CNI reports today and say that producers, converters and own equipment manufacturers (OEMs) are becoming convinced of the role the contracts will have to play in industry development.


Producers see opportunities for locking in returns at a time of high cost pressure and price volatility. Exchange members believe their potential clients will benefit with new project cash flows and the expected ability to ramp-up faster new base production capacity.


Launch of the contracts is now expected in December and much wider interest in the potential for polyolefins futures trading globally signifies not so much an acceptance of commoditisation of ‘me-too’ grades but of business reality.


Companies are acutely aware that they have to drive costs down in what has become a highly volatile – and pressured – market place. Support for the LME’s plastics futures contracts has been strong among OEMs and big polymer consumers. Increasingly, converters have come on-board, accepting, perhaps, the way the commodity business is travelling. Not all producers appear convinced that futures trading has a place in the business but those that do not seem to be swimming against the tide.


The announcement today that David Paul, formerly chief executive of Asahi Glass Plastics, has joined LME ring dealing member Refco Overseas signifies that company’s commitment to plastics futures. Other exchange ring members, the companies involved in open outcry trading on the exchange, are also likely to broaden their expertise. The LME announced in October last year that it would pursue the plastics futures idea as its plans for a steel futures contract began to fade. It has over the past nine months gained considerable support from players in the physical as well as the (potential) paper market.


This is a critical period in development of the plastics futures contracts as interest and involvement gather pace. Roadshows have sown the seeds of the idea across the industry but the trading concept will be pushed further later this year before contract launch in December. The LME has fine-tuned contract specifications but will later this month finalise the rules for producer participation and fulfilment of physical delivery.


The plastics futures contracts have to be somewhat different to metals trades in that polymers held in designated warehouses globally will only have a shelf life of six months. Secondary markets from materials delivery, however, are expected to develop.


The learning curve for producers and plastics converters is steep but the launch of the LME contracts will be another reality check for the industry.


As production capacity increases markedly in the Middle East and demand lifts in China, companies will want access to all means at their disposal to hedge and manage risks.


Risk management has been slow to take off in petrochemicals but particularly, as new producers become more important, it will prove to be an aspect of the business whose time has come. Acceptance of the new trading environment is likely to be swift and indeed faster than many believed possible earlier this year.

By: Nigel Davis
+44 20 8652 3214

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