INSIGHT: LME changes plastics in challenging times

19 December 2007 17:43  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The London Metal Exchange last week introduced yet more changes to its plastics futures contracts to try to encourage greater liquidity.

This has not been a good year for plastics futures trading. Interest has waned rather than waxed as many expected it might and trading volumes have proved elusive.

Yet there is still a body of opinion that believes plastics futures trading will eventually take hold and become an integral part of the polyolefins business.

The LME has said before that it is in plastics futures for the long-haul – although no-one at the exchange has been prepared to define “long”.

The plastics business has been likened to aluminium. It took many years for aluminium producers to move away from published price lists towards active participation in futures trading on the exchange.

The LME has put a great deal of time and effort into its plastics futures and the new contract structures look as though they can attract more market interest.

The key change is the removal of the ‘shelf-life’ element to warehoused material. The exchange says that the LME price will reflect the market-perceived value of aged material with premiums for prime material discovered in the physical market.

Prime product from producers and own brand distributors will be seen automatically as a premium to the LME price, it adds.

Other changes to the warehousing rules mean that those placing plastics on warrant in one of the exchange’s approved warehouses will not pay a ‘free on truck’ charge up-front but the buyer of the plastic chips will.

This is the way non-ferrous metals have been handled for years.

There are also changes to the brand listing process enabling merchants, traders and LME members to sponsor new brands.

Plastics futures trading appears to move in fits and starts. The daily ICIS LME plastics price report this year has shown little movement in some contract prices for weeks at a time. Open interest has been poor to say the least.

But latterly, Asia prices have had some life in them. In terms of active plastics interest and trading on the exchange, the North America contracts stand out.

The whole futures process has been hidebound in 2007 by lack of product to trade. But brokers have reported continued interest in the hedging tools.

However, the plastics industry -- from producer to trader and distributor to converter -- has been holding off. Times have been good in plastics and markets tight so as the polyolefins climate begins to chill more participants can be expected to try their hand at trading -- or at least put the processes into motion that eventually will allow them to trade.

The more ready involvement of the big financial institutions in plastics future trading however seems such a long way off. Lost in correlation was the cry from LME watchers last year.

The hope then was that a good 2007 – particularly following the launch of the exchanges regional and spot plastics contracts – would help build the body of data that could satisfy the most sceptical – or should that be the most wary. But 2007 has not provided the data. The hope is that 2008 will.

The outlook for polymers is more bearish now at a quiet time of the year and at a time of great economic and, some might say, industry uncertainty. Most feel that 2008 will start well with demand still strong and prices lifted in the most part by feedstock and energy cost pressures.

But as 2008 progresses the power that polymer producers might now have to raise prices will dissipate. The downturn could be swift.

What then for plastics future trading? The LME’s regional contracts – tied to regional delivery points look as though they will have the best chance of survival. The global contracts look more exposed.

The LME’s regional offerings, however, will come up against competition. The Dubai Gold and Commodities Exchange (DGCX) will begin to trade regional polypropylene and polyethylene futures contracts next year.

Plastics futures are already traded on China’s Dalian exchange. Local interest could prove strong given the changing nature of the plastics business and shifting patterns of supply and demand.

The LME’s plastics futures have to prove to be more popular. Indeed, without much greater active interest they will eventually founder. Paper trading in plastics will take hold but may do so well away from the traditional markets.

By: Nigel Davis
+44 20 8652 3214

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