(April 12, 2004) — Control the resin price and the profit will follow. Talk to many North American plastics processors and you'd think that was what this industry is all about.
That's why the polypropylene and polyethylene futures that are to be offered later this year by the London Metal Exchange are intriguing to processors and resin makers alike. By offering a fixed price for two specific grades of PP and PE, the LME — a 127-year-old trading floor — looks to take out some of the risk of wildly fluctuating prices. The listing will offer a hedge for users if the price exceeds the futures value. With spikes in natural gas demand driving prices up by 50 percent or more in less than a week's time — as has happened a couple of times in recent years — futures are a natural progression for the plastics industry to take.
Others have tried this route before, of course. In the late 1990s, Shell Chemical Co., Koch Industries, Louis Dreyfus Energy Corp. and the now infamous Enron Corp. all dove into the risk-management/forward-pricing market, which bears some similarities to and makes some of the same promises that LME is making. More recently, Mulitfuels LP and R.W. Beck have made similar moves, showing that the attraction of the idea remains strong. To date, those offerings have met with limited success.
Some market watchers think LME can succeed where others have fallen short because of the firm's history and scope. LME was swapping contracts when the earliest plastics were but glimmers in the eyes of the world's inventors. The exchange also handles more than $2 billion in transactions each year, mostly in nonferrous metals. So it's been there and done that.
This effort also is different from previous attempts to sell plastics futures because trading on LME is more transparent. LME bid and ask prices are published in business newspapers like the Wall Street Journal, so everyone can see where the market thinks prices are heading.
Processors and suppliers definitely will watch LME pricing, which makes it more likely that they'll look into actual plastics futures trading.
Pitfalls along the way may take the shape of nonplastics investors affecting PP/PE futures by “playing the market” as a purely financial move. Others believe that although LME has been fairly exact in the grades of PE and PP it will work with, there's still too much specification within each of those resins to make commodity futures trading viable.
If nothing else, LME might provide an alternative for the financial analysts who often call or e-mail Plastics News looking for commodity market information regarding resin pricing, only to find that there truly is no such formally recognized mechanism. The LME effort also might shorten some of the sleepless nights endured by purchasing agents throughout the industry. For those facts alone, the effort might prove worthwhile.