Dubai plastics future to offer hedging tool and greater price transparency

Rising oil and feedstock prices at their current highly volatile levels, have prepared the ground well for an exchange-traded pricing mechanism in the Gulf, which has half of the world's petrochemical projects. Plastics traders and consumers are hoping the launch of a new plastics futures contract in Dubai will offer a useful hedging tool and greater price transparency, ensuring success where London's LME has so far failed. Large plastics producers who are integrated into the oil and gas industry may be slow to adopt the new contract, but smaller players, more exposed to volatility, will be keen to use the Dubai Gold and Commodities Exchange's (DGCX) contracts. Plastics come from oil products naphtha and ethylene but cannot be hedged properly on oil futures exchanges as these markets do not always move in the same way. The bourse hopes to launch four contracts next month in low-density polyethylene, high-density polyethylene, linear low-density polyethylene, and polypropylene. For each grade, there will be three regional contracts: Northeast Asia, Southeast Asia and the Middle East. DGCX has developed different regional contracts so that futures prices can reflect the regional price differences in the physical market. As the new capacity comes on stream, analysts say oversupply will force prices lower, squeezing margins for producers. Hence producers may consider using the exchange to protect themselves from the prices falling by hedging forward. Traders said Dubai's contracts should give packagers, processors and converters in the three regions, who previously based contracts on opaque prices in specialist publications, more flexibility to trade in and out of positions.
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