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Plastic Futures Contracts
By Andre Kurten: Consultant and Trainer

he London Metal Exchange –LME- will be listing two plastic futures contract during May 2005.

Why plastic futures?
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 industry.

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)

The Plastic 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 contract
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 product
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 hood.
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).

Closing Prices
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.

Settlement Day
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

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