Less than three months before the launch of its plastics futures contracts, the London Metal Exchange is expanding its polypropylene menu and may add contracts of less than 30 days.
LME recently added a raffia PP grade for the Asian market and a general-purpose, injection molding grade of PP with a melt-flow rate of 20 for the U.S. market. Previously, LME had offered a futures contract only on a general-purpose injection PP grade with a melt-flow rate of 12.
The additions were made ``to recognize regional differences that are fairly significant,'' LME planning director Neil Banks said at the Plastics News Executive Forum, held Feb. 28 to March 2 in Litchfield Park.
``We wanted to enhance our liquidity and delivery in those two regions,'' added Banks. The recommendations were made by the firm's plastics committee, which includes representatives from resin makers Dow Chemical Co., Basell Polyolefins and BP Chemicals.
The possibility of shorter contracts also is being studied, but such contracts will not be available before the May 27 launch date of LME's initial contracts for PP and linear low density polyethylene. The initial LLDPE offering is a butene-based, general-purpose copolymer for blown film and blending.
``Some interested customers want [the futures contracts] to reflect the short-term volatility in spot trading that's more prevalent in Asia and Europe,'' Banks said. ``The concern is that, depending on what date you buy or sell a contract, there could be a gap of as much as seven weeks.''
In the nonferrous metals market - where LME has operated for 125 years - futures contracts can be as short as two days.
Anticipating the LME debut, LME member Sempra Metals Ltd. of London has begun listing prices for over-the-counter PP and LLDPE futures for September. The Sempra contracts anticipate listed grades of PP and LLDPE each selling for about 56 cents per pound in September.
Banks said Sempra's action is ``fantastic news, since it gives people an indication of where the price is.''
Banks attempted to dispel some myths that he said have surrounded futures markets. For example, he said LME strictly monitors its transactions to prevent excessive speculation that could affect prices. Industry participation also will be vital to the program's success.
``You can't have a successful market with only traders and speculators,'' Banks said. ``You need industry participation. As an end user, you participate in the pricing mechanism.''
Banks provided examples of how both a resin maker and processor could use plastics futures.
In the producer example, a resin maker with unsold output for December could sell December futures on the LME in August for $950 a ton. If by October the LME price for December drops to $900 a ton, the resin maker could sell his output to his customer and buy December futures back at the lower price.
For processors, a purchase of LME December futures could be made in August for $950/ton. If by October the price climbs to $1,000/ton, the processor could sell futures purchased earlier at the higher price, pocketing $50 a ton in the transaction.
Banks also addressed the topic of physical delivery, which has been a concern among some potential customers. He said material will be delivered at five locations: Houston; Antwerp, Bel- gium; Rotterdam, the Netherlands; Singapore; and Johor, Malaysia. But, he added, delivery only occurs in about 1 percent of all LME transactions, and typically is made to brokers and traders and not to end users.
LME still has hurdles to climb, such as public criticism from resin makers Borealis A/S and Saudi Basic Industries Corp. Recently, Basell also lobbied for shorter contracts.
Banks pointed out that LME's aluminum contract took five years to establish itself after its launch in the late 1970s, but now is used as an industry benchmark.
