9. Plastics
Teaching rewrite of plastics as a commodity: polymer chemistry, production routes, applications, the supply chain, benchmark pricing, price drivers, and hedging without a liquid futures market. Original wording; worked numbers recomputed. Prices are teaching values. Not investment advice.
Introduction
Plastics are everywhere — bottles, bags, car parts, cables, clothing — and almost all start life as crude oil or natural gas. Yet plastics are an instructive failure among commodity markets: the LME launched plastics futures in 2005 and delisted them in 2011 for lack of liquidity. That makes plastics a case study in how a commodity gets priced and hedged when there is no liquid exchange benchmark.
This lesson covers:
- Monomers and polymers: ethylene → polyethylene, and how other elements change properties
- Production from crude (naphtha) and natural gas (ethane); polymerisation
- The main polymers and uses; thermoplastics vs thermosets; moulding processes
- The supply chain and benchmark price indices
- Price drivers
- Hedging with forwards, swaps, proxy hedges, and options
9.1 Monomers and polymers
A polymer (poly = many) is a chain of monomers chemically bonded together.
- Ethylene (also called ethene) = C₂H₄: two carbons joined by a double bond, which breaks easily so molecules can link.
- Polyethylene (polythene) = [C₂H₄]ₙ, where n sets the chain length.
- Swap a hydrogen for chlorine → vinyl chloride (C₂H₃Cl) → PVC: higher tensile strength, lower melting point than polyethylene.
- Other elements (fluorine, iodine, bromine) also change properties.
- Alkenes (olefins) such as ethylene and propylene are simple, cheap, and easy to polymerise → polyolefins (polyethylene, polypropylene).
Worked example: molar masses
C = 12, H = 1, Cl = 35.5 g/mol.
| Molecule | Formula | Molar mass |
|---|---|---|
| Ethylene | C₂H₄ | 2 × 12 + 4 × 1 = 28 g/mol |
| Vinyl chloride | C₂H₃Cl | 24 + 3 + 35.5 = 62.5 g/mol |
| Polyethylene chain, n = 2,500 | [C₂H₄]₂₅₀₀ | 28 × 2,500 = 70,000 g/mol |
9.2 Producing plastics
Key building blocks: ethylene (C₂H₄), propylene (C₃H₆), butene (C₄H₈).
flowchart LR
C[Crude oil] --> D[Fractional distillation] --> N[Naphtha] --> SC1[Steam cracking]
G[Natural gas] --> P[Processing → NGLs<br/>ethane, propane, butane…] --> E[Ethane] --> SC2[Steam cracking]
SC1 --> M[Monomers<br/>ethylene, propylene, butadiene, aromatics]
SC2 --> M2[Ethylene]
M --> PO[Polymerisation + catalyst]
M2 --> PO
PO --> F[Pellets, powder, resin, film]
| Feedstock | Cost | Output |
|---|---|---|
| Ethane (from natural gas liquids) | Cheaper where gas is plentiful | High ethylene yield (~80%) but few co-products |
| Naphtha (from crude) | Dearer | Lower ethylene yield (~30%) but a broad slate: propylene, butadiene, aromatics |
The source says the gas route “yields a smaller amount”. More precisely, ethane cracking gives a higher ethylene yield but fewer co-products; naphtha cracking gives less ethylene per tonne but a wider range of products. Cheap shale ethane has made US and Middle East crackers highly competitive.
Polymerisation: ethylene reacts with a catalyst; the catalyst choice shapes the bonds and the resulting polymer (pellets, film, resin, powder).
Worked example: cracker output
An ethane cracker processes 1,000,000 t of ethane at an 80% ethylene yield → 800,000 t of ethylene.
9.3 Applications
| Polymer | Resin code | Typical uses |
|---|---|---|
| PET (polyethylene terephthalate) | 1 | Soft-drink bottles, oven-safe trays, polyester fibre |
| HDPE (high-density PE) | 2 | Detergent bottles, refuse bags, carrier bags |
| PVC | 3 | Pipes, window frames, films, clothing |
| LDPE / LLDPE (low-density / linear low-density PE) | 4 | Food bags, squeeze bottles, stretch film |
| PP (polypropylene) | 5 | Caps and closures (rigid); confectionery and tobacco films (flexible); car parts; textiles |
| PS (polystyrene) | 6 | CD cases, cartons, medicine bottles, foam packaging |
| Other (e.g. PTFE) | 7 | Non-stick cookware, seals |
Linear means the carbon backbone is straighter, so chains pack more tightly.
Thermoplastics vs thermosets
| Thermoplastic | Thermoset | |
|---|---|---|
| On heating | Softens and can be reshaped; chemistry unchanged | Chemically cures — sets irreversibly |
| Recyclable by remelting | Yes | No |
| Examples | PE, PP, PVC, PET, polystyrene, nylon | Epoxy resins, phenolics (Bakelite), polyurethane foams, vulcanised rubber |
The source lists polystyrene and PTFE as thermosets. Polystyrene is a thermoplastic, and PTFE is also a thermoplastic (though hard to melt-process). Classic thermosets are epoxies, phenolics, and vulcanised rubber.
Forming thermoplastics
| Process | How | Products |
|---|---|---|
| Injection moulding | Melt, inject into a mould, cool | Tubs, yoghurt pots, caps |
| Blow moulding | Inflate a molten tube inside a chilled mould | Bottles |
| Extrusion | Push molten plastic through a shaped die | Pipes, film, profiles |
Further processing tailors properties — e.g. vulcanising rubber with sulfur for strength and heat resistance.
Checkpoint 1: chemistry and production
Checkpoint — sections 9.1 to 9.3
1 / 5What makes ethylene easy to polymerise?
Pick an answer to see if you are right.
9.4 Supply chain and pricing
| Participant | Role | Price exposure | Natural hedge |
|---|---|---|---|
| Integrated producer (oil/gas major) | Feedstock → monomer → polymer | Falling polymer prices | Sell forward |
| Non-integrated polymer producer | Buys monomer, makes polymer | Falling polymer / rising monomer | Sell forward |
| Converter | Buys polymer, makes products | Rising prices | Buy forward |
| Distributor | Buys and resells | Both directions | Buy or sell |
| End consumer | Buys products | Rising prices | Buy forward |
| Trader | Intermediates, offers risk services | Both | Buy or sell |
Why plastics futures failed
The LME listed polypropylene and linear low-density polyethylene futures in 2005 (≈ 40% of the thermoplastics market), tweaked them repeatedly, and delisted them in 2011 — volume and open interest never built.
A futures exchange needs to provide: (1) a reference price for contracts, (2) hedging instruments, and (3) a source of supply of last resort. Plastics, with many grades and regional markets, never achieved this.
Benchmark indices instead
For a benchmark to be accepted it must be transparent, reflect the most liquid market, be used by many varied participants, and be based on actual trades rather than quotes. Plastics contracts reference price-reporting indices (e.g. S&P Global/IHS Markit, OPIS/PetroChem Wire, ICIS, Platts) — the PRA route seen in lesson 1.
9.5 Price drivers
| Driver | Effect |
|---|---|
| Crude and natural gas | Feedstock cost — the biggest driver |
| Environmental opposition | Delays new plants, tightening capacity |
| Recycling | Extra supply as collection and sorting improve. England’s carrier-bag charge (5p from 2015, 10p from 2021) cut bag use by roughly 90% — about 140 bags per shopper a year down to ~10 |
| Production capacity | Long lead times to expand cracking and polymerisation |
| Regional feedstock cost | Cheap Middle East (and US shale) feedstock pulls new capacity there |
| Disruptions | US Gulf Coast hurricanes shut plants; imports fill gaps |
| Economic cycle | Booms lift demand |
| Inventories | Cushion short-term shocks |
| Technology / substitution | Lighter, stronger PET replaced cans and glass |
| US dollar | Priced in USD — a strong dollar raises costs for others |
| Emerging markets | China and India demand |
Worked example: the recycling chain
Collect → sort by grade → wash and decontaminate → shred to flakes → melt into pellets → sell to manufacturers. Each tonne recycled is a tonne less virgin polymer demand.
Worked example: bag charge impact
Bags per shopper fall from 140 to 10 a year → reduction = (140 − 10) / 140 ≈ 92.9%.
Checkpoint 2: supply chain and drivers
Checkpoint — sections 9.4 and 9.5
1 / 5A bottle converter buys polymer. Its main price risk and hedge?
Pick an answer to see if you are right.
9.6 Forwards and swaps
Even without futures, OTC forwards, swaps, and options exist (referencing the indices).
| Type | Purpose |
|---|---|
| Price-fixing (macro) hedge | Protects overall margins, not a specific deal |
| Offset (micro) hedge | Protects a specific transaction |
| Strip | Sequential monthly forwards for a regular exposure |
| Swap | Fixed vs floating index, settled in cash — economically a strip |
Worked example: price-fixing hedge
A bottle maker buys LLDPE at the index price on delivery. In March it buys a June forward at 1,185/t. In late May the June price is 1,250; it closes the forward for +65:
Net cost = 1,250 − 65 = 1,185/t — the original forward price.
Worked example: swap
A converter pays fixed 1,200/t and receives the monthly index on 500 t. The index averages 1,260:
Swap receipt = (1,260 − 1,200) × 500 = +30,000; physical cost 1,260 × 500 − 30,000 = 600,000 → 1,200/t.
(Calling this “buying” the swap is common but ambiguous — say who pays fixed.)
Worked example: offset hedge
A distributor has sold 200 t of PP to a customer at a fixed 1,400/t for delivery in two months, and buys a forward at 1,310:
Locked margin = (1,400 − 1,310) × 200 = 18,000.
Proxy hedges
With no liquid polymer market, hedge with a correlated one (crude, naphtha, natural gas, ethylene) — accepting basis risk; correlations can break in stressed markets.
Example: regression shows PP price (USD/t) moves about 9 × the crude price (USD/bbl). To hedge 2,000 t of PP: 9 × 2,000 = 18,000 bbl → 18 crude contracts of 1,000 bbl.
9.7 Options
“If you can hedge it, you can price it.” Option writers need to hedge delta (direction) and vega (volatility) — hard without liquid underlying futures. The LME never listed plastics options for this reason. OTC writers use proxy hedges (crude, gas futures and options) and charge for the imperfection. Structures mirror those in the gold (producer) and base metals (consumer) lessons: calls, puts, collars, averages.
Worked example: a consumer cap
A converter buys a 3-month average-price call on PP at 1,300, premium 25. If the average is 1,380: payoff 80, net cost = 1,380 − 80 + 25 = 1,325. If the average is 1,200: no payoff, net cost 1,225.
Checkpoint 3: hedging
Checkpoint — sections 9.6 and 9.7
1 / 5Bought a forward at 1,150; closed at 1,230; physical bought at the 1,230 index. Net cost?
Pick an answer to see if you are right.
Rank: plastics practice
Plastics practice
1 / 2Rank the resin identification codes from 1 to 4.
OrderDrag the handle to rearrange — top should be first.
- 1LDPE
- 2PET
- 3HDPE
- 4PVC
Drag items into the correct order (or use ↑↓), then check.
Check: plastics
Plastics
1 / 6Polyethylene is a polymer of…
Pick an answer to see if you are right.
Calculate: numeric practice
Type the number (no units; minus sign for payments). C = 12, H = 1, Cl = 35.5.
Formula sheet
| Item | Formula |
|---|---|
| Molar mass | Σ atoms × atomic mass |
| Polymer chain mass | monomer mass × n |
| Cracker output | feed × yield |
| Forward hedge net cost | physical price − (close − forward) |
| Swap (fixed payer) | (index − fixed) × tonnes |
| Offset hedge margin | (sale price − forward) × tonnes |
| Proxy hedge size | β × tonnes ÷ contract size |
| Average call net cost | average − max(average − K, 0) + premium |
Calculate: plastics
1 / 12Molar mass of ethylene C₂H₄ (g/mol)?
Enter a number (at most 0 decimal places).
Randomized practice
Practice: plastics drills
1 / 6A distributor sells 500 t at a fixed 1271/t and buys a matching forward at 1221. Locked margin?
Enter a number (at most 0 decimal places).
Takeaways
- Polymers are chains of monomers: ethylene → polyethylene; chlorine gives PVC
- Feedstock: ethane (cheap, high ethylene yield) vs naphtha (broader co-products)
- Know the main polymers, resin codes, and thermoplastic vs thermoset
- Converters and consumers fear rising prices; producers fear falling prices
- LME plastics futures (2005–2011) failed; contracts price off PRA indices
- Drivers: feedstock prices, capacity, regional cost, disruptions, recycling, cycle, USD, emerging markets
- Hedge with OTC forwards, strips, swaps, proxy hedges (basis risk), and limited options
Further Reading
- Next: 10. Bulk commodities
- 8. Electricity
- 6. Crude oil — naphtha and refining
- 1. Fundamentals of commodities and derivatives — PRAs and benchmarks
- Background: N. Schofield, Commodity Derivatives: Markets and Applications (Wiley) — used as a study outline