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July 1, 2006
4 Min Read
One year after its launch of trading certain polyolefin futures on the market, the London Metal Exchange (LME) recently celebrated modest gains in the trading it has witnessed during a tough 12 months.
Although the LME reports continued growth in plastics futures, the idea has yet to skyrocket.
Neil Banks, LME director of exchange development, admits the LME came into the market at a particularly bad time-when resin was tight and prices rose. Nevertheless, he says the performance so far has been favorable in comparison to the similar introduction of other commodities such as aluminum 30 years ago when producers were outright against the futures trading idea. Today the attitude has changed, and Banks sees a far more positive response among the plastics community.
"Volumes and open interest have been on the rise again since the start of May. Feedback from members with brokers ready to trade is positive. They''re determined to make it work," says Banks. LME handles futures of three polypropylene (PP) grades and general-purpose butene linear low-density polyethylene (LLDPE) copolymer grades. PP that is listed comes from Dow, Innovene Europe (ex-BP), Formosa Plastics, Basell, Chemopetrol in the Czech Republic, Thai Polypropylene, India''s Reliance Industries and Haldia Petrochemicals, Carmel Olefins of Israel, Slovnaft from Slovakia, Muehlstein Americas, and Tiszai Vegyi Kombinat of Hungary. Polyethylene is provided by Dow, Innovene, Thai Polyethylene, Reliance, Formosa, Haldia, and Muehlstein, in addition to Malaysia''s Titan Petchem, and Equistar.
LME has approved 35 warehouses in Antwerp, Rotterdam, Malaysia, Singapore, Baton Rouge, and Houston to store material. In the last 12 months the LME traded 60,000 tonnes of PP and 350,000 tonnes of LLDPE, he says. Trading is carried out in so-called Open Outcry session, two five-minute periods daily where ring dealing members haggle over both polymer contract amounts and prices. Contract trading also occurs in two "curb" general trading sessions daily, by electronic trading via the LME Select system from 7 a.m. to 7 p.m. London time, and the LME''s 24-hour telephone market.
Banks points to two recent trading improvements which the LME introduced at the end of May that should help stimulate trading. "Admittedly the LME was extremely conservative in determining the shelf life of bagged polymer when we started," he says. The year of experience showed no deterioration of material during that time, so the LME has consequently increased shelf-life of PP and LLDPE from six to 36 months from production. (The LME upped shelf-life to 10 months in November of last year.) The exchange is also exploring the feasibility of introducing a discounting process for product delivered toward the end of its shelf-life.
The exchange has also added more so-called "prompt dates," which will mean that, at all times, trading will be possible for settlement in two working-days'' time (cash) and in addition, trading for the next business day (cash on the day or the following day) will be allowed.
So why hasn''t there been more interest in trading plastics futures from the start? Banks believes a lack of liquidity and a failure of major producers and end-users to trade them in anything but minimal volumes has dogged the idea. One of the LME''s previous detractors, polyolefins producer Borealis (Vienna, Austria), appears at least to be watching the outcome of trading to determine its future possible association, if any, with the LME. "We have no plans [to trade in contracts] until we get tonnes of liquidity. We''re just sitting on the sidelines," says Frank Peterson, Borealis feedstock manager. "If you look at liquidity, no trend is emerging. The success of any futures contract is in its liquidity."
James Andrews, head of plastics at Marex Financial (London), one of the LME''s category 1 ring dealing members, says beside the problem of liquidity, producers are still using ICIS-LOR or Platts to determine pricing rather than relying on LME trading. He believes this conservatism should change as interest in trading grows.
Sabastian Castelli, plastics analyst at Société Générale Corporate & Investment Banking (London), another ring dealer, sees that processors are gradually starting to move toward LME pricing in the hope of benefitting from hedging. "But there is still a lot of `wait-and-see'' out there," he says.
Charles L. Hatton, senior VP, industrial materials group at Man Financial (New York), another ring dealer, saw 22 contracts traded last year with his company, yet he isn''t satisfied with the state of development. "The industry needs to step up and actually participate in trading to stimulate the market," Hatton says. Those who have traded are hedging prices rather than buying stocks, he says. Only one processor, negatively affected by a lack of polymer in the U.S. due to Hurricane Katrina last year, actually bought and processed European-stored polymer through Man Financial, he says.
LME''s Banks doesn''t see an expansion of the LME offering into other polyolefin grades or other polymers before 2008. However, he says the LME is already studying what kind of future demand there could be for bottle-grade PET, vinyl, and high-density PE, as well as polystyrene.
Robert Colvin [email protected]
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