New US ethylene futures contract will boost liquidity - CME

15 June 2009 23:57  [Source: ICIS news]

HOUSTON (ICIS news)--A US ethylene futures contract that began trading on Monday will improve liquidity and could eventually allow plastics buyers downstream to manage fluctuations in petrochemical prices, a CME Group official said.

“This will help participants deal more freely because they don’t have to worry about counterparty credit risk,” said Alex Siff, manager of energy products and services with CME, the parent company of the NYMEX and the Chicago Board of Trade.

There was no activity on the Mont Belvieu ethylene contract’s first day of trading, but Siff said there could be action by the end of the week after participants set up internal trading systems.

She said the eventual goal would be for polyethylene (PE) buyers or banks acting on behalf of buyers to reduce the risk from feedstock ethylene price changes.

Currently, US ethylene market participants can manage price risk by trading physical futures contracts for natural gas liquids (NGL), which are one step up the petrochemical chain from ethylene.

“Now we have the middle of the chain,” Siff said.

Since the introduction of NGL contracts in November 2008, open interest has grown quite rapidly. The Clearport exchange saw about 2.5m-5.0m bbl of NGL traded each day last week, according to CME documents.

PE and polypropylene (PP) contracts, however, have not traded since their launch last year.

Michael Greenberg, chief executive of the online resin brokerage The Plastics Exchange, said the new ethylene contract would facilitate spot physical business for current users and sellers of ethylene, including cracker operators and PE and ethylene oxide (EO) producers.

But he said the ethylene futures contract would have to expand beyond the over-the-counter broker system in order to become a widely used hedging tool for plastics processors.

Even with sufficient liquidity on the Clearport exchange, he said, an “outsider” financial firm or resin processor may have difficulty finding willing counterparties among olefins brokers and producers.

“My hope is that they could get some liquidity through Clearport and then open it up to the general public by creating a pure futures contract listed on Globex,” Greenberg said.

“Then resin processors and other industry stakeholders could hedge their exposure to ethylene, the main component to the price of PE.”

Greenberg is co-founder of the PetroChem Wire, which will be used to settle the front-month ethylene contract.

Each ethylene contract traded on CME’s Clearport electronic clearing system represents 100,000 lb (45 tonnes) delivered to the Williams storage facility in Mont Belvieu, Texas.

CME will watch how well the ethylene futures contract is adopted by the industry before proceeding with the launch of a propylene contract.

The US ethylene spot market, which is larger and more transparent than propylene, was considered a better candidate to test the viability of an olefins cleared futures contract, Siff said.

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ICIS Copyright © Reed Business Information 2009

Author: David Barry
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