INSIGHT: LME plastics futures slump while chem makers seek alternatives

19 January 2010 17:19  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Plastics futures trading on the London Metal Exchange (LME) shrank in 2009 with little or no interest in some of the regional, and the exchange’s original global, linear low density polyethylene (LLDPE) and polypropylene (PP) contracts.

But the latest data on these first exchange-traded plastics futures contracts belie the increasing interest globally in chemicals risk management.

With prices falling away and margins under pressure in 2009, particularly at its start, producers were keen to lock in margins and were seeking out products and mechanisms to do just that.

The LME and some of the world’s big banks have reported a good year for over-the-counter (OTC) products referenced either to the exchange’s numbers or to other price points.

The exchange says the OTC market in monthly average financial swaps, or MAPS, referencing the LME price, is believed to be at least five times the on-exchange market.

In 2009, however, there can be no denying the fact that the LME’s plastics futures contracts continued to fail to gain support in Europe and Asia.

Even over the course of the year the number of trades was limited. There was little or no open interest in the contracts at the year end.

Plastics activity for the exchange was centred on North America, with propylene PP contract volumes up 11% at 2,713 lots, equivalent to just over 67,000 tonnes.

LLDPE North America volumes were down 58% compared with 2008, although the LME says that there was a noticeable increase in activity in the fourth quarter.

The exchange-traded contracts have suffered with the downturn but have singularly failed to attract the attention of more than a handful of producers, traders and distributors.

This has to do with the reluctance of most producing companies to give away what little pricing power they have, but also with the complexity of the LME’s offering and the fact that it is tied into the exchange’s network of approved warehouses and trading members.

Exchange trading has a cost which most players are unwilling to pay. They want to manage risk, but on their own terms.

The exchange has sought to make plastics futures trading more attractive - by introducing regional contracts and by lengthening storage times - but has always been slow off the mark.

Its contracts, also, have in the view of many, been far too complex.

Adopting a system based on bagged lots of plastics created barriers in the US, where plastics are traded by the railcar load.

Plastics producers and converters, however, particularly in such a difficult and uncertain price environment, want to lock in margins. And increasingly, integrated producers would prefer to work with a suite of products that can allow them to hedge exposure from feedstock through to the polymer. Business is being done on chemical intermediates and price vulnerable polymers other than LLDPE and PP.

But manufacturing companies do not necessarily trust the banks following the 2008 global financial meltdown. This is leading to the development of hybrid products that are eventually cleared on an exchange.

The LME’s job, however, has been likened to “pushing a pea uphill”. With so few active traders and trades in most of the exchange’s plastics contracts, it is immense.

No-one quite understands how China’s domestic Dalian exchange works, but its plastics futures traded in record numbers through 2009. Dalian plastics prices also, based on nothing but sheer liquidity, began to represent something of a reference China price.

The LME says its prices are increasingly being used in commercial contracts and that all parts of the chain are active in the market. That is encouraging, but its plastics products need to attract a great deal more liquidity if they are to successfully tap into a clear industry need.

For more on LLDPE and PP visit ICIS chemical intelligence
Read John Richardson and Malini Hariharan's Asian Chemical Connections blog
Click here to find out more on the European and Asia margin reports
To discuss issues facing the chemical industry go to ICIS connect


By: Nigel Davis
+44 20 8652 3214



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