The very foundations of the chemical markets have become increasingly risky since mid-2008.
In the third quarter of that year ethylene market participants saw the liquidity of their own feedstock markets dry up as major players dropped out along with their creditworthiness. The credit concerns extended to ethylene majors by the fourth quarter and several key players were suddenly unable to trade with ease, if at all.
Aside from cash injections or mergers, only a clearing house could restore liquidity. That’s exactly what happened when in late 2008 the CME group quietly introduced cleared paper contracts for natural gas liquids.
Then, Rather than having 12 or 20 creditors, the parties involved had one: Clearport. The efficiency was immediate, and by January 2009 more than 90 percent of all paper deals for the NGL market were transacting through Clearport. A major cultural shift took less than 60 days to occur.
So could a cleared ethylene contract work?
Until 2002, only companies that consumed ethylene received deliveries Then the market moved to storage wells and the trading of ethylene began. Where NGLs bridge the gap between and energy and ethylene, ethylene bridges the gap to most downstream chemical markets, including the world of plastic resins.
Clearing is no longer a taboo subject. A futures contract developed with the guidance of market participants requires more vigilance to ensure fungibility for this sensitive delivery-based market. While not delivered contracts, the success of NGL swaps on CME’s Clearport system has held great meaning for the current ethylene market participants.
In June 2009 the CME launched an ethylene futures contract that settles against PetroChem Wire. This will allow an important part of the petrochemical market to hedge risk via this new physically settled contract.