Dubai sees strong Asian interest in plastics futures

Dubai: The Dubai Gold and Commodities Exchange (DGCX) expects strong Asian participation when it rolls out plastics futures contracts later this year, an executive said on Wednesday.

Requests by Asian plastics firms looking for a hedging tool and the size of the Asian plastics industry was a sign that demand would be firm, said James Bernard, associate director of the Dubai Multi Commodities Centre, a majority stakeholder of DGCX.

"The feedback we are getting from Asian companies is great, and they are all very keen to see the contracts launched this year," Bernard said.

"Many companies are interested in being able to make use of these futures contracts. Having the facilities to hedge against adverse forward price movements will provide useful risk management for them."

DGCX aims to launch four contract grades later this year in low-density polyethylene, high-density polyethylene, linear low-density polyethylene and polypropylene as a useful hedging tool for the plastics industry. For each grade, there will be three regional contracts: North-East Asia, South-East Asia and the Middle East.

Plastics are derived from oil products but cannot be hedged accurately using oil futures as these markets rarely correlate sufficiently. The DGCX is based in the commercial hub of the Gulf - home to half of the world's petrochemical projects - trades mainly commodities and currencies.

Basis risk

Trading in polypropylene and linear low-density polyethylene futures on the London Metal Exchange (LME) started in May, 2005, but volume has been low so far. One difficulty those contracts have faced is "basis risk" - differences between LME prices and prices in the underlying market at futures monthly settlement.

However, regional differences between the prices of plastics have sometimes eroded the correlation between the LME price and underlying market, preventing full convergence and hampering delivery of physical plastic when the futures contracts expire.

But DGCX says it has avoided this problem by developing different regional contracts so that futures prices can reflect the regional price differences in the physical market.

The new contracts will be largely paper-settled but will allow for physical delivery at various locations to get convergence between the spot and futures prices.