By Andre Kurten: Consultant and Trainer
London Metal Exchange –LME- will be listing two plastic
futures contract during May 2005.
Like any other commodity, players in the plastics market are
exposed to price risk. To date there have not been any risk
management instruments available to the plastics converting
Price risk may occur when the US Dollar price
of a commodity changes due to the influence of supply and
demand factors, but it may also occur for importers and exporters
as the value of their currency changes in the foreign exchange
markets. The influence of supply and demand is influenced
greatly by the perceived demand from major users and producers,
in particular the USA and China. Plastics have much in common
with metals. They are primary industrial raw materials that
have established themselves in the fabric of modern life.
Metals and thermoplastics are both $120 billion markets. In
many cases plastics have replaced metals where the inherent
advantages of light weight, exceptionally broad range of physical
properties and design possibilities have played a major role.
Not surprisingly the main categories of customers are very
similar to metals and many large buyers of metals also purchase
substantial quantities of plastics.
Over the past 125 years the LME has, in close
consultation with industry, developed highly successful futures
contracts for non-ferrous metals which, like plastics are
also primary industrial raw materials.
Types of Plastics
Plastics are divided into two broad categories - thermoplastics
and thermosets. Thermoplastics soften with the application
of heat and can be injected into moulds and then cooled to
form shapes. An example of an article made from thermoplastic
is the plastic soft drink bottle or plastic bag.
Thermosets as the name suggests, are plastics
that contain a setting mechanism allowing them to be shaped
by hardening using a chemical reaction. An example of a thermoset
application is the advanced composite fuselage of a stealth
bomber or a modern tennis racquet frame.
Thermoplastics are by far the largest class
by volume and value. In 2002 global consumption of the 5 major
thermoplastics was 149 million tons, having a value of just
under $120 billion.
- Polyethylene’s (films, bags, bottles, drums)
- Polypropylene (automotive, films, textiles)
- Polystyrene (consumer durables, foams)
- PVC (pipes, and building)
- PET (bottles for water & soft drinks)
Futures Contract Specifications
The specifications for both futures contracts are identical
in nature with the only difference being the underlying product
that is deliverable. The two underlying products on which
the futures contracts will be based are:
- Polypropylene (PP), homopolymer general purpose injection
moulding grade, nominal melt flow rate 12, ‘barefoot’.
- Linear Low Density Polyethylene butene (LL) copolymer
general purpose blown film and blending grade, nominal melt
flow rate 0.8, ‘barefoot’.
Delivery against the futures
There will be physical delivery of the contracts with delivery
monthly, on a global basis, the choice of which LME approved
brand and delivery location (Houston, Antwerp / Rotterdam
area and Singapore / Johor PTP) at the seller’s option.
Packaging of the delivered
Standard delivery, 24.75 tonnes packaged on 18 pallets in
25 kilo bags (55 lb bags in USA), 55 bags per pallet, each
pallet shrink /stretch wrapped and covered with a plastic
Contracts available for trading.
Initially there will only be futures contracts traded with
no LME options or TAPOs contracts until liquidity in the futures
contracts has reached a level to support them.
The Pricing Basis
The contracts will trade based on a price reflective of the
LME deliverable product free on truck, duty unpaid, in LME
approved Fiscal Warehousing / Free Trade Zone, choice of brand
and location at seller’s option.
Major trading currency is US dollars, can also be traded and
cleared in yen, euro and sterling.
Official Reference Prices
Official reference prices established as per current LME system,
but basis open outcry at the end of the first Ring trading
session of the day (i.e. at 12:25 London time).
Official Settlement Prices
The official monthly settlement price will be derived from
the reference price set on the last business day of the month
preceding the delivery month (i.e. the expiry month). This
price will be the official reference offer price (seller's
price) set at the end of the first Ring trading session of
the day (i.e. at 12:25 London time).
Daily closing prices established as per current LME system,
basis open outcry in last trading session of the day (i.e.
17:00 London time).
Delivery is by electronic transfer of Plastics Warrants (PWs)
from seller to buyer using the LME’s SWORD system on
the Settlement Day. The seller has the choice of which PWs
to deliver but must ensure that the appropriate PWs are available
to deliver by the deadline.
The Third Wednesday of each calendar month. This is the day
when all plastics contracts are settled, either by payment
for the cash difference between buy and sell contracts and/or
for the delivery of PWs that will be transferred from seller
to buyer, via the brokers and LCH.Clearnet, in fulfilment
of each person’s delivery obligations. Invoicing for
PWs will be basis the LME settlement price for that month.
Plastics Warrants (PWs)
Each PW is a bearer document of possession (as with LME warrants)
representing a specified parcel of physical product in 25
kg bags (55 lbs in USA) at facilities operated by LME approved
warehouses in LME approved delivery points.
Once the warehouse has satisfactorily checked the documentation
and completed its visual inspection of the bagged, palletised
(shrink/stretch wrapped and covered with a plastic hood) product,
it will instruct its London agent to create the relevant PWs
using the LME’s SWORD system.
There will be maximum age parameters set for deliverable
material so that it cannot be placed on
a PW if it has been delivered into the storage point more
than two calendar months after the start date of its batch
production run. It cannot be delivered against an LME contract
if it is more than
six calendar months after the month of its batch production
run when delivered.
Once the contracts have been launched in May 2005, you will
be able to view prices, and price graphs detailing the forward
price curve for PP as well as brand information on the London
Metal Exchange website www.lme.com
Source and references for this article