The London Metal Exchange, the world's biggest nonferrous metals futures and traded options exchange, has specified which plastic resins it will begin trading later this year.
The materials will be a general-purpose injection molding grade of polypropylene without additives and a general-purpose film/blending grade of linear low density polyethylene with slip and anti-block additives.
The contract size for plastics will be based on 24.75 metric tons (about 55,000 pounds) per lot, representing one 40-foot container load of 18 pallets.
Futures will be tradable, primarily in U.S. dollars, each month for up to 15 months forward, according to LME.
LME will establish an official price daily at 4 p.m. London time, on the basis of that day's ``open outcry'' trading in the polymers on the exchange trading floor. That will provide the industry with a benchmark price.
The exchange selected the first two resins for contracts because they are ``the most accepted and recognizable polymers globally,'' according to an LME spokesman. ``If these are a success, we expect to add high density and low density polyethylene and bottle-grade PET contracts early next year,'' he said.
LME said it believes plastics manufacturers and consumers will use the tools to hedge against pricing risks.
While metals futures and options have traded for years, efforts to sell similar products based on plastics are a newer development. But LME officials pointed to similarities between the plastics and metals markets. Each represents a $120 billion market, and both experience price volatility.
LME had planned to launch its first plastics contracts by the middle of this year, but the deadline was postponed to allow for more industry consultation.
Currently, LME offers trading in metals including copper, zinc, tin, lead, nickel, aluminum and some aluminum alloys. The materials are bought and sold by telephone, on computer screens or on LME's trading floor.
Reaction from the plastics sector has been mixed, with some firmly in favor of such a move but others still uncertain whether plastics trading will lead to a new era of polymer price stability.
``Certainly, the material suppliers see this as a good thing. But it is too early to say if the introduction will be beneficial or otherwise to the industry,'' said Brian Mann, president of the British Plastics Federation and managing director of extruder and injection molder McKechnie Plastic Components of Walsall, England.
Mann pointed out that larger users of PP, such as McKechnie, already agree to prices on a quarterly basis with their suppliers.
James Madden, a consultant with Chemical Market Resources Inc. in Houston, said the challenge faced by other companies that have tried to establish plastics futures markets has been the existence of ``only a very small handful of workhorse grades of material'' suitable for such a market.
``There are a lot of nuances and differences in material,'' Madden said. ``Most of them don't lend themselves to trade in barges where you have one spec.
``The term that gets used in resin is that they're not fungible. There's not one recognized spec like there is on a material like benzene. The theory of stabilizing prices is what keeps drawing people back to the idea, but the practice is much more difficult.''
At the same time, Madden conceded that ``if anyone can make [plastics futures] work, it's someone like [LME].''
LME ``has the heritage and market understanding and firepower that a lot of these other firms didn't have,'' Madden said. ``But [LME] has to be able to convince big processors and suppliers that they can get control of some of the leader grades.''
Strategy research manager John Nash with Applied Market Information Ltd. of Bristol, England, suggests the exchange's move is ``ill-timed,'' since pressure for resin price stability was far more acute two or three years ago.
Oil has been traded for many years, but the price of oil hardly is stable now, said Nash.
He said it ``remains an open question'' as to whether the entry of LME to the market will lead to stable prices.
Plastics News staff reporter Frank Esposito contributed to this report.