The London Metal Exchange is changing the look of its plastics futures contracts.
Starting June 25, LME will offer separate North American, European and Asian contracts for polypropylene and linear low density polyethylene. LME's global contracts for those materials - which were launched in May 2005 - also will remain available.
LME also will add plastics contracts with one- and two-day prompt dates - which are close to physical spot prices - along with the original 30-day contracts. Additional contracts of varying lengths also may be introduced, LME development director Neil Banks said during a Feb. 5 conference call from London.
Banks said the changes are being made after discussions with customers and members of LME's plastics committee, which includes representatives from several resin firms.
``It's important to understand that when we entered, there were no financial derivatives anywhere for plastics,'' he said. ``It's been a voyage of discovery for the industry and for us. We first said we would review the program after three years, but these changes will effectively speed up the process, so there's really no point in waiting that long.''
Banks added that the changes ``will increase the liquidity of trading in the exchange, and will make it easier to get into and out of the market without the price moving against you.''
``In a way, [the changes] will feed off each other. Regional trading will help spot prices. The tendency will be that they'll help each other.''
Some North American resin market watchers have indicated that the LME's futures prices more closely have resembled Asian physical prices in their 20-month history.
Banks explained that global futures prices ``tend to gravitate toward the region of lower cost ... and at times that's been the Asian market.''
Banks added that market conditions following the North American Gulf Coast hurricanes of late 2005 also affected LME global futures contracts. Such movement is more transparent in highly developed markets for metals, but is less so in newer markets for plastics, he said.
LME officials are comfortable with the way the exchange's plastics futures markets are progressing, according to Banks. The aluminum futures market - with which plastics often are compared - took eight years to reach significant volume and liquidity.
Since its inception, LME has handled contracts for about 1.6 billion pounds of PP and 1.4 billion pounds of LLDPE, although very few of the contracts have resulted in physical delivery.
Also being reviewed by LME is the difference between standard North American rail-car resin delivery and delivery in 50-pound bags, as is common in the rest of the world.
The difference results in North American buyers considering the bad price to be an import price, rather than a domestic one. Banks said LME officials are trying to resolve that issue.
``The plastics industry really does need price risk management,'' Banks said. ``If we don't get it right the first time, we'll have to keep working at it.''