When the London Metal Exchange (LME) launched it first two plastic futures contracts on May 27, 2005, it was, at last, possible to trade "barefoot" (plastics with no additives) in the ring (on the LME).

You could have traded plastics futures in China back in the 1990s, but you would certainly have had to wear galoshes: Trading on the Chinese markets was eventually suspended "due to rampant speculation and irregularities."

Now, however, you can trade plastics futures not only on the LME, they are also traded on China's Dalian Commodity Exchange and India's National Commodity and Derivatives Exchange (NCDEX). The Dubai Gold & Commodities Exchange is, after some delay, expected soon to launch its own plastics futures contracts. And rumors still swirl of NYMEX's plans for a plastics contract.

Why futures in plastics? In the words of the LME, plastic futures contracts "enable the plastic industry to hedge against volatility in plastics prices."

The Plastics Industry

Plastics are everywhere. Consider, just for example, the food, packaging, medical, building and automotive industries: all are huge industries, all rely on plastics. The thermoplastics market is, consequently, itself, huge, worth in excess of $200 billion, on par with the market in nonferrous metals.

Of thermoplastics today, the primary demand is for polyolefins (polypropylene [PP] and polyethylene [PE - made up of LDPE, LLDPE and HDPE]).[1] Together these now account for some 62% of global commodity plastics consumption. And in case you are wondering what they are used for, polypropylene is used, for example, in bottles and bags, and polyethylene is used in anything from consumer packaging to car fenders, and from water tanks to crates.

FIG 1.

Source: CMAI

The major factors affecting the prices of these polymers are: the prices of the ethylene and propylene feedstock, crude oil prices and prices for naphtha and natural gas. In addition, prices are affected both by regional and global supply and demand and geopolitical factors.

The plastics production chain is, essentially, three-tiered.

Source: LME & NCDEX

In 2007, the world's largest polyolefin producers (in order of size) were: ExxonMobil (XOM), Dow (DOW), Basell (privately held Dutch company that is the world's largest producer of polypropylene and advanced polyolefins products) and INEOS (a large "tightly held" private chemicals company headquartered in the U.K.).

FIG 2.

Source: Borealis

Plastics Futures

When the LME first launched its two plastics futures contracts back in 2005 (one for PP, the other for linear low density polyethylene [LLDPE]), they were both global contracts, i.e., any material on warrant for the relevant product can be delivered in settlement of the futures commitment.

At that time, there was really no fully functioning spot market in these plastics. So, although trading got off to an enthusiastic start, interest in the contracts subsided over the following couple of years.

At the end of June last year, however, the LME launched three additional regional contracts - for Asia, Europe and North America - to better reflect "...the variations in the use and trade of plastics around the world." This is observable, not least, in the significant variations in volatility regionally.

FIG 3. Volatility In Yearly Average Polyolefins Prices (%)

Source: SGCIB Commodities

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