LME looks to increase financing participation in plastics futures

Using its highly successful metals contracts as a model, the London Metals Exchange (LME) announced a series of changes to its futures contracts for polypropylene (PP) and linear low-density polyethylene (LLDPE), with the biggest alteration aimed at increasing participation by banks and financiers. To encourage such financial players, the LME eliminated the concept of a discounting structure, whereby resin’s value would be altered depending on how long it had been warehoused. When the contracts first launched, the LME operated under the belief that the materials would deteriorate over time, and this degradation would need to be accounted for. The discounting structure was never put in place, but the threat scared off players like banks who can buy and sell lots in the same day or issue asset-based loans, but need to know that the underlying materials have the same value.

“Originally, the feeling was that plastics was more akin to a soft commodity than a hard commodity and subject to deterioration,” explained Martin Abbott, LME’s chief executive, who said during a teleconference that the exchange completed an independent study that determined the materials do not break down if properly stored. “[Discounting] killed the ability to bankers and financiers to get involved.”

The LME also made it easier for brands to become listed, allowing “merchants” or distributors to list a brand on the exchange, instead of only allowing the original manufacturer to do so. The distributor would still need certificates and other forms to verify the grades, but the LME believes this will increase the number of resins available. At this time, LME officials report that there are more than 13 LLDPE suppliers and more than 20 PP suppliers participating, reflecting over 15% of the global capacity for each resin. In the final change, the LME extended the length of time from when a material has been produced to when it can be warehoused from four to 12 months.

Originally launched in May 2005, the contracts have undergone several changes including the introduction of regional contracts in June 2007. “I’m hoping these are the last major changes, but I’m also not going to apologize for making them,” Abbott said. “There will always be some evolution in the contract.”—[email protected]