INSIGHT: A regional future for LME plastics

04 June 2007 17:23  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The plastics industry may not be awaiting the end of June with bated breath but it should be prepared to take in its stride the introduction of new regional plastics futures contracts by the London Metal Exchange (LME).

The re-vamp of plastics futures trading on the exchange comes in response to present day realities – that plastics is a multi-regional rather than a truly global business.

The new futures offerings, however, highlight the LME’s and its traders' conviction that, in plastics, times are changing and that if they do not make plastics futures trading work others will.

New contracts for linear low density polyethylene (LLDPE) and polypropylene (PP) for Asia, Europe and the US, add weight to the LME’s plastics offering. They also give companies involved with plastics – producers, distributors, processors, customers and traders alike – much more hedging and risk management capability.

And have no doubt, plastics is a risky business. Viewed from the current sunny uplands, price risk may not loom large. But in a few short months new quantities of low-cost material will start to flow from the Middle East into markets in Asia, Europe and the rest of the world.

The widely expected commodity plastics-led downturn will have arrived. Producers particularly will be exposed in ways not seen in years.

How the LME’s plastics offerings fare in a declining market remains to be seen.

Poor correlation between futures and assessed plastics prices have been the bugbear for the LME. Since their launch back in May 2005 trading in the exchange’s global LDPE and PP contracts has been poor. Industry interest particularly has not been piqued.

But the global contracts have attracted steady trader attention . And from 25 June and the launch of the six new regional futures vehicles, as well as changes to make plastics trading easier overall, all might change.

LME brokers talk of building a “better mousetrap” with the new contracts. Regional instruments can work much better than their global counterparts. Tomorrow and two days forward trading also introduce what some in the industry believe are vitally important spot elements.

The global contracts have languished for long periods over the past month and more but that has been because change is at hand. Fast forward another six months and a great many more 24.75 tonne lots of polymer and warrants for them could be changing hand through the exchange.

It is too early as yet to say that the LME has got its action together but it has listened to critics and supporters alike. Being able to trade regional contracts up to 15 months forward on an almost any day basis gives traders and their clients more opportunities to be creative. If closer correlation between paper and the physical world follows there could be a snowball effect.

The LME has likened plastics to aluminium – a major launch for the for the exchange in the late 1970s but a contract that took eight years to take hold. Aluminium is now its largest contract which last year turned over a cool $2.6trn.

Plastics futures could go down the aluminium route. The LME appears determined it will.

New regional plastics contracts highlight current realities and also future prospects. The plastics paper trade is here to stay.

By: Nigel Davis
+44 20 8652 3214

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