China Tongcheng Tianbai Plastic Co.,Ltd.

LONDON (October 26, 2010) -- 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.

LME Chief Executive Martin Abbott added in the release that the LME and its committee members “have 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, and the time has come to bring this activity to a close.”

Futures contracts — used to ease volatility in pricing — long have been utilized in agriculture, metals and other industries, but haven’t been able to gain a foothold in plastics, even though several companies have launched products in recent years. Such contracts – for high density PE, as well as PP and LLDPE - still are available from the Chicago Mercantile Exchange and New York Mercantile Exchange, both of which are 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 often said that they hoped that the 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 that the demise of the LME plastic futures could be a boon to those offered by his Chicago-based firm.

“We can easily take on the volume that was done on LME,” Brusstar said. “We’ve recently expanded our program with additional swap [contracts] and we plan to offer more.

“We’ve seen increased interest from customers. People are still very interested in managing price risk.”

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 with Brusstar’s observations, and added that he was not surprised that LME exited the plastics field.

“It’s inevitable for one contract to become dominant,” Paulsen 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 also each said that they believe some plastics firms were using the LME settlement prices to set their own over-the-counter contracts. If so, this would be a way of using the futures process, but one that would not 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 that a number of his clients remain interested in futures contracts.

“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.”