Rapidly escalating feedstock costs and price volatility continue to raise concerns across the world’s polymer markets. Producers, converters and users of polyethylene and polypropylene see ready demand for their products but they are faced with feedstock and energy costs at unprecedented levels. Price volatility has become a real issue for producers and converters who are more used to simply managing their inventories to hedge exposure to raw material price movements and shifts in demand.
Greater interest is now being shown in the use of alternative hedging mechanisms, particularly by firms already used to hedging currencies and upstream oil.
The London Metal Exchange (LME) has caught a wave, with its global and subsequently regional linear low density polyethylene (LLDPE) and polypropylene (PP) plastics contracts. LME member companies have reported growing interest in the Exchange’s plastics contracts and correlation with the cash markets has been good since the launch of regional contracts last August.
Market data also shows that good use is being made of the contracts, particularly in North America. Since the launch of the regional and cash contracts for LLDPE and PP, a clear differential has persisted between North America’s cash and contract prices and those in Europe. The correlation between cash market prices and LME prices has improved markedly since the new plastics contracts’ launch.
LME prices have closely followed discovered spot prices for LLDPE and PP in North America and Asia as they have in Europe. The LME prices for Europe LLDPE and PP are about 8 per cent lower than discovered cash market prices, the differential representing duty and delivery costs.
When plastics delivery terms are brought in-line with those for non-ferrous metals at the end of April, members expect more clients to take advantage of the arbitrage opportunities presented by price differentials between North America and Europe.
And, as margin pressures increase and the industry heads for what many believe will be a supply-driven downturn, exchange-driven futures trading is expected only to grow in popularity.
Some firms have been following propane to PP spreads in the Americas. Others have shown interest in naphtha to LLDPE in Europe and Asia. It remains difficult to show correlations between naphtha and other feedstock prices and olefins but the LME data can be used to follow the differentials one step back up the feedstock chains.
In addition, interest in risk management has been growing on a worldwide basis and new risk management systems are being developed as the petrochemicals industry searches for ways to militate against cost and demand volatility exposure.
This is evidenced through the growth of exchanges offering futures contracts in plastics. The Dalian Commodity Exchange in China and the Multi Commodity Exchange of India are just two such examples. Other exchanges such as the Dubai Multi Commodity Exchange are working towards launching plastics contracts.
The principal driver behind this growth is the widespread acceptance that markets are volatile and likely to remain so. In such an environment, risk management becomes an increasingly valuable tool for consumers, producers and other plastics industry participants.
