INSIGHT: Converters coveted for plastics futures

23 November 2007 16:14  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The protagonists of plastics futures always said it would take time for trading to take off or become more widely accepted as a means of hedging against price risk.

The trouble is currently that plastics futures trading on the London Metal Exchange (LME), and increasingly globally elsewhere, is something of a luxury that requires time, money and understanding.

The LME awaits, for instance, the participation of most of the big polymer producers and more of the movers and shakers in plastics.

But which converters have the time or the inclination to commit to the lengthy process that would allow them to hedge on the exchange?

And for the financial players, where are the data on which market participation might be based?

LME brokers say that trading interest is growing but LME data show that interest is still very thin for the Asia and Europe contracts. The exchange re-launched its plastics contracts in June to include regional – Europe, Asia and North America – contracts alongside its global offerings and shorter prompt dates.

The situation is different for the North America regional contracts with more participants seemingly ready to take advantage of trading opportunities. But the US has always led the way in derivatives trading.

The LME’s plastics futures have attracted interest largely from industry, as might be expected in the early stages of any contract.

The contracts are performing as expected and feedback is still positive, an LME spokesman says.

“It is going to take time for data to be correlated in a meaningful way,” he adds. “It has only been five months.” 

The exchange’s continued marketing and education programme is seen as important.

At this stage, though, many cash market participants still tend to dismiss the exchange’s offering and see the numbers it produces as largely irrelevant.

It is telling, however, that the paper market has not been dismissed. A body of support is building from brokers’ customers. Plastics paper trade is gaining ground.

That notion is further supported by the enthusiasm - at least from some - for the launch of plastics futures contracts in Dubai which is due in early 2008 and the business done in linear low density polyethylene (LLDPE) on the Dalian Commodity Exchange exchange in China.

Participants will use these markets for different purposes. But because plastics futures trading is at such an early stage it is not clear by any means how the different markets might be expected to develop.

“Launching new futures contracts is always a hazardous process,” CEO of the Dubai Multi-Commodities Centre (DMMC) David Rutledge said in an interview with ICIS news this week.

DMCC is the majority owner of the Dubai Gold and Commodities Exchange (DGCX) which plans to launch contracts for four polyolefins for the Middle East, Southeast Asia and northeast Asia in January.

The launch date for the new contracts has been pushed back a little, which shows how difficult it can be to launch new contracts of this type.

As Rutledge says: “There are no certainties for launching futures exchanges. [But] going forward, the need for these products will be clearer than in the past.” However, it looks as if they will fly.

Rutledge says there has been a lot of interest in plastics futures, particularly in the Middle East, and that due to high and volatile energy costs there is a need for a new price discovery mechanism.

Dubai is offering Middle East plastics contracts for the first time. Its plastics business is differentiated from that of the LME in the way in which delivery locations are structured. The plastics delivery points are Dubai, Malaysia, Singapore and South Korea.

The LME’s difficult experience with its global linear low density polyethylene (LLDPE) and polypropylene (PP) contracts and the way its regional contracts have garnered interest says a lot.

There is possibly more stomach for plastics paper trading in North America, for instance. Plastics chain participants in Europe and Asia either are less inclined to trade or find it more difficult.

The progress made with plastics on the DGCX will be watched with interest particularly as the planned dramatic increases in polymers production capacities, largely Middle East-based, come on-stream

In many ways traders on the LME, and now the DGCX, await the sector downturn. 

By: Nigel Davis
+44 20 8652 3214

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