How will the plastics contracts change from 28 April 2008 as a result of the changes that have been announced?
The London Metal Exchange (LME) will make changes to its plastics futures contracts for polypropylene (PP) and linear low density polyethylene (LL) which will align the plastics futures contracts with the successful metals futures contracts model.

*Changes to the contracts will be introduced from 28 April 2008 and will apply to the regional and the global contracts.

Following a recommendation from the LME Plastics Committee, and a decision by the LME Board, the Exchange will introduce the following changes:
• The contracts will move from a free on truck (FOT) contract basis to an in-warehouse basis, as used for LME non-ferrous metals. It will no longer be necessary for the party placing the material on warrant to pay the cost of loading the material from the warehouse onto a flatbed truck for outward delivery. This will be the responsibility of the party taking up the warrant through the clearing mechanism.
• The shelf life for LME Plastics Warrants will be removed to facilitate greater liquidity through financing of material on warrant. Visibility of aging warrants will continue to be provided through daily reports from the Exchange. This report can be requested by emailing lmehelpdesk@lme.com.
• The brand listing process will be modified to allow plastics traders, distributors or LME members to sponsor the listing of an LME brand with a Letter of Support from a recognized user of the product.
• The latest warehouse arrival date is extended from month of production plus 4 months to month of production plus 11 months and the requirement for a warrant to be created within 18 months inclusive of the production month is removed.

What do regional contracts for Asia, Europe and North America offer to the industry?
Regional contracts reflect the different ways regional markets operate, and therefore the price differences, in the same way that the LME’s aluminium alloy contracts work currently. They also help to improve price correlations with the physical market and offer additional arbitrage opportunities.

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How are plastics contracts traded?
Contracts are traded by LME member firms through:

• Open-outcry in ring trading sessions and two ‘kerb’ general trading sessions
• Electronic trading via LME Select between 0100 and 1900 (London Time)
• The LME’s 24 hour inter-office telephone market

For current Ring Trading times click here

Why does the plastics industry need price risk management?
Price volatility has been a significant issue for the plastics industry for several decades and it exposes both buyers and sellers of polymers to a high level of price risk. With volatility rising to over 50% in recent years, many in the plastics industry supply chain are finding this difficult to manage. Futures contracts provide industry with the ability to manage this volatility.

Volatility in yearly average polyolefins prices (%)

How do futures contracts help the plastics industry?

Plastics futures contracts enable the plastics industry to hedge against volatility in plastics prices:

– Hedging is the process of managing the risk of a price change by offsetting it in the futures market

The ability to hedge gives producers, converters and consumers in the industry the choice of how much price risk they are prepared to accept.

How can I learn more about hedging on the LME?
The LME runs regular workshops in different locations on hedging using LME futures contracts. The workshops give comprehensive teaching on how the LME and its contracts work - click here to find out more

The LME also publishes a book: Managing Metals Price Risk which is applicable to the LME plastics contracts. The book gives a detailed insight into how the LME market operates.

Where can I access LME plastics market data?
LME plastics 24 hour delayed market data is available free of charge from the LME website

Available data includes: official settlement prices, warehouse stocks and open interest.

Real time and delayed market data is available from the LME’s own data service LMElive and also licensed market data distributors. Details of all distributors are available on the LME website - click here

Historical data can be purchased from the LME’s On-line Store

Where can I find a list of the LME members that are active on plastics?
Category 1, 2 and 4 members are eligible to trade on behalf of clients. If you wish to find out more information about which members are active on plastics, please contact info.plastics@lme.com

A full list of LME members and their contact details are available by clicking here

How are the contracts delivered?
Contracts are deliverable by the transfer of Plastics Warrants (PWs) through clearing using the LME’s SWORD system. Each PW is a bearer document of title representing a specified parcel of physical product in 25kg or 55lbs bags at facilities operated by LME approved warehouses at LME approved delivery points.

Once the warehouse has satisfactorily checked the documentation and completed its visual inspection of bagged, palletised (shrink/stretch wrapped and covered with a plastic hood) product, it will instruct its London Agent to create the relevant PW(s) using the LME’s SWORD system.

Refer to the full contract specifications available for more information.

Where are the delivery points?
Delivery points are LME approved warehouses in LME approved locations, currently:

- Houston / Baton Rouge / Mobile
- Antwerp / Rotterdam area
- Singapore / Port of Tanjung Pelepas (PTP), Malaysia
- Gwangyang / South Korea

Refer to the LME warehousing and brands page for more information.

What is the difference between the global and regional contracts, in delivery and warehousing terms?
Any material on warrant for the relevant product (Polypropylene (PP) or Linear Low Density Polyethylene (LLDPE)) can be delivered in settlement of a global futures commitment. However, only material on warrant in the specific region relating to the regional futures contract can be delivered in settlement of a specific regional futures commitment.

For example:

For the regional contracts: warrants for plastic stored in North American approved warehouses will only be deliverable against the North American contract. A polypropylene (PP) warrant in a North American approved warehouse can only be delivered against the North American PP contract. A LLDPE warrant for material stored in Europe can only be delivered against the European LLDPE contract, and so on.

For the global contracts: Plastic Warrants regardless of where the plastic is stored in warehouse (Asia, Europe or North America) will be deliverable against the global contract for that product. That is, a PP warrant for material stored in Europe can be delivered in settlement of the global PP contract, as can an Asian PP warrant and a North American PP warrant.

Where can I find a list of LME warehouses where material on plastics warrant is stored?
Warehouse stocks information is available by registering for the free market data service - click here

The exchange also publishes a full report detailing the current age of all stock in each warehouse. This is sent out daily. If you would like to be added to that list please send an e-mail to the LME Helpdesk: lmehelpdesk@lme.com

How do I find information on product stored in LME warehouse?
Warehouse stocks information is available by registering for the free market data service - click here

The exchange also publishes a full report detailing the current age of all stock in each warehouse. This is sent out daily. If you would like to be added to that list please send an e-mail to the LME Helpdesk: lmehelpdesk@lme.com

What is the cost of storing material on LME warrant?
The LME does not operate the warehouses nor does it set the rates charged for rent or handling.  These are matters of commercial negotiation between the warehouse and its clients, although the Exchange does publish the warehouse companies' maximum charges.

For an up to date list of the maximum charges click here

Where can I find margining rates for the LME plastics futures contracts?
LCH.Clearnet, the LME's recognised clearing house, calculates margining rates for both initial margin and variation margin for all LME plastics futures contracts. For more information - click here

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How is the official settlement price established?
The official settlement price is established basis ‘open-outcry’ trading at the end of the first ring trading session of each business day. The official settlement price is the last cash seller’s price (offer) established at the end of the first ring trading session - click here for more information. All prices are quoted in US Dollars.

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What effect have the contracts had on plastics price volatility?
Futures markets neither increase or decrease volatility, they merely reflect the volatility in the underlying physical market and provide industry with greater price transparency. The LME plastics contracts provide a tool for managing exposure to that price volatility through hedging on the Exchange.

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What is the size of the plastics market?
The thermoplastics market is worth upwards of approximately $200 billion, a comparable size to that of nonferrous metals. PP global capacity is about 46 million tonnes, compared to an output of 23 million tonnes for aluminium. Similarly, the production capacity of LL is analogous with copper, their figures being 15 million tonnes and 16 million tonnes respectively.

Sources: Chemical Week (August 2006) International Aluminium Institute (IAI) (February 2007), Business Standard (February 2007).

How have the plastics contracts been developed?
The LME consulted widely with industry in the development of the contracts, and since launch the contracts have been reviewed and continue to be enhanced with the full participation of the LME Plastics Committee.

This committee has included representation from many organisations including: Barclays Bank plc, Basell Polyolefins, BBA Group, BPI, Chemair Technologies, Credit Lyonnais Rouse Ltd, The Dow Chemical Company, Goldman Sachs International, Hellyar Plastics, Innovene (formerly BP Chemicals Limited), Katoen Natie, Koch Industries, LCH.Clearnet, Marex Financial Limited, Mitsubishi Corporation, Muehlstein, Natixis Commodity Markets Ltd, Proctor & Gamble, Rexam plc, Sempra Metals Ltd and Societe Generale.