INSIGHT: Bright outlook for Dubai polymer futures

19 August 2008 12:50  [Source: ICIS news]

By Prema Viswanathan

 

SINGAPORE (ICIS news)--It is hardly surprising that polymer suppliers in the Middle East and Asia are more enthusiastic about participating in plastics futures trading than their counterparts in Europe, a region whose status as a key production base for polymers is steadily being eroded.

 

By mid-2009 we will see close to 8m tonnes of new polyolefins capacity coming on stream in the Middle East, while around 2.8m tonnes will start-up in Asia. There will be many more polymer producers engaging in a battle for market share than there are now. In addition, the unpredictable direction of crude has been casting its shadow over petrochemical markets.

 

The price volatility that these factors are likely to unleash in polymer markets in the Middle East and Asia is a scary prospect for suppliers. All of them are therefore looking at strategies to cope with this imminent roller-coaster market.

 

And one of these is using hedging mechanisms such as futures contracts.

 

The plastics futures trading system set to be launched by the Dubai Multi Commodities Centre (DMCC) and the Dubai Gold and Commodities Exchange (DGCX) later this year seems unlikely therefore to suffer the dismal fate faced by a similar offering on the London Metals Exchange (LME), said producers, traders and end-users. 

 

The LME’s plastics futures contracts has not received much support from producers, as exemplified by the exit of LyondellBasell from the exchange’s plastics committee in April this year.

  

The volumes traded on the LME’s plastics contracts have been weak compared with the LME metals contracts. But the LME’s defence is that its biggest traded futures contract, aluminium, took 10 years from launch to reach high trading levels.

 

The DMCC’s associate director for commodities, James Bernard, certainly doesn’t think it will take that long for the Middle East and Asia futures contracts to take off.

 

"We now have the support of a large number of companies, all of whom are setting up DMCC companies. We are also holding workshops for traders, brokers, processors, consumers and producers, and over 100 attended the last one," said Bernard.

 

According to Bernard, there was enough evidence to suggest that there would be sufficient liquidity in the market when DMCC launched the contract in the fourth quarter of this year. Several market players in the Middle East support Bernard’s premise.

 

“In Europe, the polymer market is relatively stable, as trading is mostly on a contract basis. This is very different from the situation that prevails at present in the Middle East and Asia, where spot trading is dominant,” said a Dubai-based trader.

 

Hence the system being launched by the DMCC and DGCX had a greater chance of success than the LME exercise, he said.

 

Another factor that works in favour of the Dubai system is that it hopes to involve brokers on the exchange as well as trade members, unlike the LME, which allows only its member companies to trade in plastics futures.

 

The much delayed Middle East and Asia plastics futures contracts would bring much-needed sanity to a market that is currently in considerable turmoil, said a producer.

 

“Of course, we would prefer to negotiate directly with our key customers and even work out long-term contracts with them as European producers have been doing,” said a Middle East polymer producer. “But there would be considerable spot availability targeted at smaller customers which could be traded through the futures contracts.”

 

According to an end-user based in Dubai, the plastic futures contract system could help it hedge against volatility.

 

“I need only a few containers of polyethylene (PE) and polypropylene (PP) every month  and am not given priority treatment by suppliers. So I would much prefer to operate through brokers on the Dubai exchange to safeguard against future price swings,” it said.

 

However, some traders and end-users were quite sceptical about the success of the venture.

 

“Having seen the slow progress of LME’s plastics futures experiment, I would be very wary about participating in the Dubai contracts,” said a second Dubai-based trader.

 

It will be interesting to see how many market players in the Middle East and Asia echo his sentiment.

 

To discuss issues facing the chemical industry go to ICIS connect

 

By: Prema Viswanathan
+65 6780 4359

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