Resin Pricing - From Well to Railcar
In the first part of this podcast series, I discussed the process of manufacturing a finished resin pellet, starting from the oil or natural gas that comes out of the ground. Each of these steps has its own market pricing structure, and reacts is a unique way to the markets up the chain. The second part of this podcast series will explain these pricing relationships.
Spot and Contract Markets
These markets all deal with, broadly speaking, two tiers: a spot market and a contract market. The spot market refers to a commodity that is sold for cash at an agreed upon price and delivered at a specified time. Spot deals reflect market pricing at the time of the transaction.
The contract market refers to a long-term agreement between a producer and consumer for delivery of a certain amount of a commodity. Depending on the market, pricing can be determined in a variety of different ways for different periods of time. In the olefins (ethylene and propylene) and resins (polyethylene, polypropylene and polystyrene) markets, contract prices are typically determined monthly. This will be discussed in more detail later in the podcast.
NGLs
NGLs such as ethane, propane, butane and naphtha are the key raw materials used in steam crackers to make ethylene. In the 1980s, the spot market for NGLs started to grow as liquidity increased and traders entered the market. A robust paper market developed by the 1990s. Chemical companies now are faced with daily fluctuations in NGLs prices and buy feeds in the spot market, and also under long-term contracts that are based on spot prices. The NGLs being cracked in the steam crackers, called a feed slate, can fluctuate daily. This often times makes spot ethylene instantly reactive to the NGLs market. Energy markets are often a factor in determining a NGLs market trend. Ethane is the bellweather feedstock for the olefins industry as it is the only NGL that has no other use than for steam cracking.
Ethylene
Ethylene is the primary chemical produced from NGLs that are put into a steam cracker. The price of ethylene can be determined by factors upstream in the NGLs market as well as multiple demand factors downstream.
The spot market factors heavily into determining prices for the entire ethylene market. A new ethylene price is determined each day, or multiple times per day, in the spot market, which is instantly reacting to fluctuations in energy and NGLs prices as well as ethylene production factors and downstream demand. While liquidity is growing, it still represents only about 5% of the total ethylene produced, but it’s the most important 5%. The spot market can be influenced by a variety of factors. Some days upstream fluctuations in NGLs prices push ethylene up or down, while other days it could be upstream factors, such as particularly weak or strong demand from resin producers that drives the spot market.
The remaining ethylene that transacts under long-term contracts typically is priced based on weighted average spot prices and cash costs, which reflect fluctuations in energy and NGLs prices. The industry typically uses the PetroChem Wire’s ethylene weighted average.
Propylene
The propylene market is also largely priced under long-term supply contracts with monthly pricing. But like ethylene, it also has a relatively active spot market that contributes to pricing.
If you recall from the first podcast in this series, there are three grades of propylene: refinery, chemical and polymer grade propylene. Polymer grade propylene, or PGP, is the raw material used to make polypropylene. There are two methods used to manufacture PGP in the US. It can be produced as a byproduct of the steam cracking process, or by running refinery grade propylene through a splitter to make PGP.
The economic model for the splitter operator typically factors heavily into settling prices for all three grades of propylene each month. The splitter operator is focused on maintaining a spread between the RGP and the PGP price.
Of the three propylene grades, RGP is the most actively traded in the spot market. PGP spot deals are infrequent, and CGP spot activity is even rarer. RGP spot prices can be influenced by demand from chemical market applications such as polymer grade propylene and cumene. But it has an alternative use as a feedstock for alkylate, which is an octane booster in gasoline. Supply to the chemical market can tighten if it is more economical to put RGP into the gasoline pool versus selling it into the chemical market.
PGP and CGP prices settle in tandem, with CGP at a 1.5-cent discount to PGP each month. These contract prices are typically determined two ways. One is to use a cost-based settlement mechanism, which can use a weighted average spot RGP price from the previous month. The other is to settled on a posted PGP price and apply a discount.
Polyethylene and Polypropylene Resin
While the bulk of PE and PP also move under long-term contracts, there is a vast and highly liquid spot market.
In a steady-to-up market, resin price discussions typically start with producer price increase initiatives, which often come out monthly, but can sometimes be seen mid-month as well. Producers send letters to their customers announcing their intent to raise prices.
The spot resin market is heavily influenced by daily movements in the monomer markets, particularly for PE, due to the high liquidity in the ethylene monomer market. The spot PP market tends to react to the direction of the spot RGP market. Factors also influencing sentiment are the state of resin production, demand and sentiment as to whether producer price increase initiatives will be implemented.
Unlike the upstream markets, resin market contracts typically do not factor in spot resin pricing. This is largely due to the lack of transparency and a spot index. For years, these contracts were based on a posted assessed price with discounts applied. The lack of spot market transparency is largely due to the vast number of grades, and difficulty defining a commodity-grade resin.
While this is still prevalent, some producers and consumers have stopped recognizing a published index. Some have switched to a different posted price, while others are increasingly turning to cost-plus contracts. A cost-plus contract has been more prevalent in polypropylene, which ties prices to the current-month published PGP contract price. In polyethylene, there are some that have also started to turn to a cost-plus contract, but ties it to a weighted spot ethylene average such as the PCW average.
This is a brief explanation of how prices interact across the chain. Spot price movements up and down the chain can react to each other instantly, but it can often take up to two months or longer for market trends in the NGLs market to be realized at the pellet level. More information on these market movements are available in the PetroChem Wire’s daily newsletter.
_____________________________________
The PetroChem Wire is a daily newsletter serving the petrochemical industry. It counts every major chemical and refining company among its subscribers, as well as many major manufacturing concerns, global conglomerates, industry consultants, equity analysts and government agencies.
Contact:
Mark Quiner, Senior Editor
+1 713 331 0464
mark@petrochemwire.com
www.petrochemwire.com
Copyright 2009