The London Metal Exchange is ending its plastics futures contracts, after the 5-year-old program was unable to generate significant volumes.
The last prompt dates for all existing contracts for specified grades of polypropylene and linear low density polyethylene will be April 29, 2011, LME officials said in an Oct. 20 news release. The firm had ended floor trading of the contracts in mid-2009, choosing to handle only online and phone transactions.
Despite a number of changes to the contracts and the subsequent launch of regional contracts, no significant volume or open interest has been established, and the exchange believes that this position is unlikely to change in the foreseeable future, officials said in the release.
LME's chief executive, Martin Abbott, said LME has put considerable effort into this endeavor to bring transparency and hedging facilities to the plastic business.
But we must now recognize that these efforts have not attracted sufficient volume of business, he said.
Futures contracts used to ease volatility in pricing long have been used in agriculture, metals and other industries, but haven't gained a foothold in plastics, even though several companies have launched products in recent years. Such contracts, for high density PE, LLDPE and PP, still are available from the Chicago Mercantile Exchange and New York Mercantile Exchange, both owned by CME Group.
As of late 2007, more than 30 resin makers were participating in the LME futures programs and contracts for more than 3 billion pounds of material had been issued although those volumes remained well below those of more established metals.
LME officials had said they hoped plastics futures would follow the path of aluminum, which was lightly followed for several years before gaining acceptance and becoming a baseline for pricing in that industry.
In an Oct. 20 phone interview, CME Group energy research director Dan Brusstar said the demise of LME plastic futures could be a boon to those offered by his Chicago firm. We can easily take on the volume that was done on LME, he said.
We've recently expanded our program with additional swap [contracts] and we plan to offer more. ... People are still very interested in managing price risk.
CME's physically delivered HDPE plastics futures contract has record-high open interest equivalent to 18 million pounds of HDPE for delivery through September 2011, officials said.
Brusstar added that the LME program might have been hindered by waiting until last year to offer swaps, which some North American customers had been asking for. The option to take physical delivery only in Houston also was unappealing to some potential customers, he said.
Eric Paulsen, who offers CME plastics futures through his Houston Mercantile Exchange in Houston, agreed, and added that he is not surprised LME exited plastics.
It's inevitable for one contract to become dominant, he said by phone Oct. 20. There's been more interest from the North American market, so the product has in some ways become more tailored to North America.
Brusstar and Paulsen believe some plastics firms were using the LME settlement prices to set their own over-the-counter contracts. If so, this way of using the futures process is not one that would benefit LME in any way.
At Resin Technology Inc. a Fort Worth, Texas-based consulting firm that advises on resin buying President Garland Strong said a number of his clients remain interested in futures.
They want predictability in pricing, he said. They want some way to hedge on prices, so it's a little bit surprising to me that futures haven't caught on more.