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Futures finding steadier ground

February 1, 2006

4 Min Read
Futures finding steadier ground

Launched last May, the London Metal Exchange''s (LME) futures market for PP and LLDPE continues to advance, if incrementally, with new developments already in the works.

I think the general trend in trading volumes is increasing; particularly once we hit the first delivery month [September 2005]," explains LME Director of Strategy Neil Banks. "Then people saw that you can make and take delivery-that the process works without any hitch-so volumes have picked up since then."

Plastics trading volumes, measured in lots, had reached 11,856 (293,436 tonnes) in PP and 5245 (129,814 tonnes) for LLDPE as of Nov. 11. Open interest, or future contracts still in hand, have increased steadily since the May 27 launch, hitting approximately 700 for LLDPE and just over 1500 for PP at the end of October.

Banks says LME''s futures prices have tracked physical ones relatively closely, especially between the U.S. and Europe, although there has been some disparity compared to the Far East, which Banks felt was correcting.

"This contract is only a few months old," Banks says, "and you would not expect the futures contract to be behaving the same as it would on maturity. So it''s developing, and it''s getting there, and it''s giving us a lot of hope for the future."

Michael Greenberg, CEO of The Plastics Exchange (TPE; Chicago), a spot market that trades in LLDPE, HDPE, PP, high-impact polystyrene, general-purpose polystyrene, and LDPE, has followed the progress of the LME, and how its prices compare to the physical market it deals in, noting some discrepancies on a geographic basis.

"The LME market tracks the cheapest price in the world," Greenberg says, "and that region could change as local market fundamentals change. The contract is a bit premature trying to create a global price. The reality is that in physicals, we currently have a series of regional markets, due largely to local feedstock costs."

Still, Banks reminds that "the LME price contract is a global one" noting that when Hurricanes Katrina and Rita impacted North American LLDPE production, supplies and prices worldwide reflected any shortages in feedstocks like ethylene.

Futures here and now

In daily trading, Banks says PP has traded in greater volumes than LLDPE, but that''s somewhat expected given the size difference in the underlying markets of the materials. Bid/offer spreads, or the difference between what contract holders buying and those selling lots can get, have been fairly consistent according to Banks, and relatively narrow. In a mature market like aluminum they may only range up to a dollar, but in plastics they''ve been in the $10 to $15 range.

Banks says the exchange has seen a mix of participants, including plastics suppliers and processors, but use by end consumers of plastics, such as Procter & Gamble or Wal-Mart, has been difficult to determine, although processors could be acting as a proxy for end consumers.

Suppliers pitch in

Compared to the launch of aluminum futures in 1978, support by PP and LLDPE suppliers has been strong, with polyolefins major Basell coming on board in late December as another recognized brand, joining Reliance, Innovene, Dow, Formosa, and others. When aluminum futures trading launched, no producers of the metal participated. "[Aluminum producers] wanted to wreck the contract basically,'' Banks says, "but as the traders and merchants acted as proxy for them, they provided sell-side liquidity, and the consumers were in there on the buy side."

Going forward, Banks says the LME is considering adding PVC and bottle-grade PET to its plastics portfolio this year, with an initial focus on PET. The LME was also in talks with the Multi Commodity Exchange in India, which will use the LME''s settlement price for aluminum and nickel, with plastics a possibility in the future. The exchange wants to add steel to its contracts, completing the packaging portfolio along with plastics and aluminum, and the LME is in talks with China regarding the possibility of setting up warehouse locations in China for metals and, eventually, plastics. Banks hopes that ultimately the exchange''s contract settlements determine a global benchmark price for PP and LLDPE.

Tony Deligio [email protected]

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