Why Gamble on Plastics Prices?

In the past year, many plastics processors found themselves forced to gamble on materials prices.

In the past year, many plastics processors found themselves forced to gamble on materials prices. If they were lucky enough to get a job that would last beyond the current month, they had to bet the odds on where resin prices would go. They'r still gambling, even though prices may be heading the other way (see Pricing Chart ).

Starting this month, processors can place a new kind of bet, one that lets them lay off some of that pricing risk. As we reported in February, the London Metal Exchange, or LME, will introduce the world's first commodities futures trading in plastics on May 27. Futures contracts will be traded daily for deliveries 15 months later of 27-ton lots of four plain-vanilla grades: one g-p butene LLDPE for blown film and three PP homopolymers—two for injection (12 and 20 MFR) and one for "raffia" fiber extrusion.

This is not a new way to buy resins—almost no one is expected to take delivery on the futures contracts. They are a financial hedge for resin buyers and sellers to gain protection against price volatility. Some sources are skeptical that our industry will benefit from a new "casino" in which financial "sharpies" can speculate on plastics. I have to admit that I shared some of their doubts. But after learning a bit more from the LME, I got the impression that futures trading probably can't hurt, and it could help—whether a little or a lot remains to be seen.

LME says futures won't stop price volatility, which depends on factors inherent to the market. Futures are just tools to manage volatility, and they make prices more transparent. One important thing futures would do is provide the first recognized global reference prices that plastics have ever had. Futures also give protection to the little guy—either by buying futures directly or through indirect effects. LME expects some of the first buyers to be plastics distributors, giving them "insurance" to offer customers fixed prices for longer terms. Now that would be a real benefit.