Commodity Derivatives: Markets and Applications

8

Plastics

It is now estimated that each person in the developed world consumes on average more than their body weight in plastics a year.

Quote from Risk magazine ¹

The purpose of the chapter is to describe how plastic is made, which factors impact its price and how the market risk associated with buying and selling plastic can be managed using derivatives.

 

I suspect for many readers it may have been a long time since they studied chemistry and so the basic physical structure of plastics is documented in the first part of the chapter. This also serves as a useful introduction to some of the technical terms used in the industry such as monomers and polymers.

The next section outlines the commercial supply chain for plastics, which starts with either crude oil or natural gas to produce the monomer building block. This is then polymerised before being manufactured into an end product.

The main drivers that affect the price of plastic are outlined, followed by a description of the main derivatives. At the time of writing, the main derivative market was centred on the futures contracts offered by the LME. As liquidity improves, it is expected that more OTC structures will gradually emerge.

8.1 THE CHEMISTRY OF PLASTIC

Plastic is a general term used to describe different chemical structures. At a very basic level, plastics are formed when carbon and hydrogen atoms are combined in different ways. Groups of atoms bonded together form molecules which, when linked together in different ...