- Markets & Risk Newsletter
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- Plastics Futures Remain Volatile In the classic 1967 film "The Graduate", Mr. McGuire has one word to say to Benjamin: "Plastics." It was sound career advice, because forty years later the thermoplastics market is worth $200 billion, an amount comparable to nonferrous metals. In 2007 global consumption of all plastic was 181 million tonnes, and by 2010 analysts forecast consumption will reach 227 million tonnes. The production capacity of linear low-density polyethylene (LL), primarily used for car fenders, is 15 million tonnes annually, comparable with copper (16 million tones). Global production capacity of polypropylene (PP), which is used in bags and bottles, is about 46 million tonnes, compared to an output of 23 million tonnes for aluminium. What determines the spot price of plastics? Plastics pricing reflects supply and demand, the cost of raw materials including petroleum, and the increasing globalization of industries consuming or converting plastics. Until the first decade of the twenty-first century, historically cheap petroleum prices fueled production for companies like DuPont and General Electric Company, and supported substitution away from metals, paper, and glass.
By 2008, the effect of $110 per barrel of crude oil drove up prices for plastics and goods made from plastic. Between 2002 and 2008, the price of high density polyethylene used to make milk bottles rose 144 percent, and the price of plastic used for soda and water bottles went up 65 percent. The PVC used to make plumbing and sewer pipes rose 111 percent. Plastic prices were pushed upward after Hurricane Katrina, which in 2005 damaged the sprawling plastics manufacturing industry along the Gulf Coast. For several decades price volatility has been a significant issue for the plastics industry, and fluctuations expose both buyers and sellers of polymers to a high level of price risk. The lack of transparency in base costs globally restricts the ability of the packing industries to adjust prices. In addition, the ability of the converters and the consumer industries to pass on price fluctuations is limited by end-user fixed-price contracts that typically have terms of one to three years.
With volatility rising, in 2005 the London Metals Exchange (LME) introduced two new futures contracts for PP and LL plastics. The contracts are designed to offer a financial tool to manufacturing companies seeking to manage their price exposure to fluctuating polymer prices. They aim to reduce the extreme cyclical pricing volatility throughout the plastics packing supply line, including primary producers, converters, and logistics companies. Hedging enables the plastics industry to manage volatility in plastics prices by offsetting it in the futures market. The ability to hedge gives industry consumers, converters, and producers the choice of how much price risk they are prepared to accept. Investors who seek to offset plastics market volatility need all the help they can get. In 2008, PP prices soared to US$1,940 per MT in July, and by November had hit bottom at $650—less than half the price. Prices rebounded to $1,000 on June 17, and have subsequently fallen below $900. Similarly, LL prices reached a 2008 high of US$1,770 per MT in July, and sunk to $720 by January 2009. They now hover just under $1,000. For information on powerful risk-management tools that allow you to track and measure the risk of LME plastics as well as forwards and options on LME metals, contact PortfolioScience today. |
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