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Futures promise to plastics

The London Metal Exchange is to launch plastics futures contracts for PP and LLDPE in May, claiming it will “enable converters to offset price risk for the first time”.

According to the LME, the plastics and metals markets have much in common. Both are primary industrial raw materials, have $120 billion markets and share common end user sectors. Most importantly, it says, the profiles of producers and consumers in plastics and metals are very similar, with approximately 300 producers selling from a distance to thousands of consumers. Many large buyers of metals also purchase substantial quantities of plastics, and the main consumer industries are also similar, including packaging.

Over the past 30 years, says the LME, pricing in plastics markets has exhibited high levels of volatility. The price risk in the plastics consumption chain is high, as raw materials constitute over 75 per cent of the total manufactured cost of many plastics articles. This has led to recognition amongst converters, many of whom hedge metals purchases, of the need to establish a terminal market offering instruments to hedge plastics price risk.

Futures have been used over the past 150 years to protect producers and consumers from the adverse effects of price volatility on their margins. Hedging is the process of managing the price risk inherent in a business, by offsetting that risk in the futures market. The ability to hedge will enable the plastics industry to decide on the amount of risk it is prepared to accept.

The LME says its delivery based contract model is easily adapted for plastics futures and many major plastics consumers are already familiar with and have confidence in its market due to their metal hedging activities.

UK plastics film industry body PIFA comments: “There are mixed views both by users and polymer producers on how this development will affect the market. This will only become clear once the trading opportunity has been in place for some time and the market will decide which route it favours.

“It should be remembered that the majority of trade that takes place currently in the metals market does not result in physical delivery but is used as a hedging mechanism against price movements by forward buying and selling. The challenge to buyers of polymers will be in developing a business procurement strategy which acknowledges this situation rather than the current buy and supply principles that they have with their present suppliers.”

Will it develop more stable pricing for buyers? According to PIFA, this will depend on the demand supply position “but it should give the option of more predictability and insurance against significant price movements due to changes in the supply demand patterns”.

Another question is whether the introduction of a third party – the dealing members – will increase prices. “It should be remembered that they are there to offer a service and to some degree an insurance against price movement, and clearly there will be a cost for this,” says PIFA. “However, polymer will still be available direct from manufactures and the free market will give buyers the opportunity to develop strategies that best suit their businesses.

The association concludes: “The advice we would give to our members is to ensure that they understand their contractual obligations and relationships they may build with dealing members. It is crucially important that the procurement policy of companies buying polymer fully reflects the implications of the futures market and that this is incorporated into their strategic approach if they intend to use the futures market for all or part of their polymer needs. At the end of the day, the market will decide the usefulness of a futures trading position.”

In conjunction with the British Plastics Federation, the LME is staging a free educational roadshow for potential users of plastics futures. The event will take place on February 9 at the Millennium Hotel, London


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London Metals Exchange