New paper-based NYMEX contracts launched for HDPE, LLDPE

) launched a paper, or swap, market offering contracts for blowmolding-grade high-density polyethylene (HDPE) and film-grade linear low-density polyethylene (LLDPE), complementing the physical cash-settled contracts the exchange introduced in November 2009 for polypropylene (PP) and polyethylene (PE). Just as the exchange did with the ethylene futures contract it launched in July 2009, NYMEX will utilize price indexes from The PetroChem Wire (PCW) for the settlement of contracts. Kathy Hall, who founded PCW in 2007 along with resin spot-trading platform The Plastics Exchange (TPE), and investment firm Lawson Energy, told PlasticsToday that the May 25 launch of the swap contracts should shed more light further downstream on a market that has been marked by near total opacity in the past.

"I think [the new contracts] further the evolution of the supply chain down to resins and beyond by bringing transparency, or at least the promise of transparency or a tool with which to bring greater transparency," Hall said. "I don't know many people who think that's a bad thing."

Unlike the contracts for PP and LLDPE created by the London Metal Exchange (LME) in May 2005 and NYMEX's previous plastic contracts, these newest contracts represent paper options for risk-management services in which there is no delivery. Hall says these allow a company or individual to either buy or sell a swap contract to help manage risk, set prices, or lock in margins, but never actually have resin physically delivered.

The prospect of actually having material delivered and either using it or selling it back to the market has traditionally served to help police prices in a futures market. Because there is no delivery here, Hall says it will be PCW's price indices that keep the market honest. "Without an index, you run a risk of prices getting away from reality," Hall said, comparing the use of PCW for settlement to the use of the Oil Price Information Service (OPIS) for the natural gas liquid contracts also offered by NYMEX.

For HDPE and LLDPE, PCW creates forward pricing curves that extend from the current month to 12 months out. In ethylene, the price curve goes 18 months out. Hall says the prices PCW publishes for the resins are cash prices for domestic resale. Given the various price points along the supply chain, broker price from producer, producer price to converter, Hall said it was key to isolate one segment of the chain: the broker market.

The fact that it's a paper market without the possibility of physical delivery is likely to be an enticement to financial institutions to participate, but Hall said fears over speculators commandeering resin prices should be tempered. "There is sometimes a concern about speculation, especially from companies that don't seem to personally hold any tangible manufacturing assets," Hall said, "but I do think that a tool like this, as it evolves, does keep itself close to the cash market and reality."

"[The market] is all centered around risk management," Hall said, "and that of course is an area where financial entities have a far greater interest than they do in actually receiving rail cars of resin." In those instances, financial firms would often participate on behalf of large consumer companies, for instance, and Hall believes many financial firms will simply add resin price hedging to the list of risk-management services they already provide corporate clients.

Whatever the potential downside, Hall said the status quo, which has seen ethylene go as high as the $0.70s and as low as the $0.30s in the first four months of 2010, is not acceptable for many market participants.

"All of this, the LME the NYMEX, these are all the result of efforts by that community to bring about a workable tool that will help this market evolve into one of greater transparency," Hall said. "I think that greater transparency, to my mind, can limit volatility and that's something that I think a lot of people have been looking for in resin markets, particularly in the last few years." —Tony Deligio