Why Upstream Matters - Changing Dynamics in Resin Pricing
Two watershed moments have occurred in the US petrochemical/resin chain this year. One was in February, and one was in June.
During the last week of February, all major polyolefin resin producers informed their customers that they would no longer recognize a published index used for many years to determine contract pricing.
On June 11, a major supplier of ethylene informed its customers that it would price its product relative to crude oil and nothing else.
These two developments reveal the desperation for price transparency, a rallying cry to help usinesses operate smarter and enable markets to evolve.
The crude futures market has become a paragon, a symbol of evolution, transparency and functionality. At the same time, several steps down the production chain, resin contract prices are centered on a delta that masks a non-discounted contract price that will run through several formulas before a transaction number is reached.
Spot resin pricing is sore point for the market as few in it disclose their pricing at all. The evolution of the generic prime market has helped a spot market to evolve, as it removes the brand name from the products and brings it closer to a true commodity. But with few reporting their transactions and most information remaining of the “could have” type (”I could have bought at 68 cents”) rather than provable bids and offers, many are skeptical of resins price information they do see.
The relevance of spot resins pricing has historically been dismissed by many producers because the majority of material produced in the US is priced on a negotiated contract basis. Suppliers issue an idea for a delta change to an undisclosed price and negotiate with their customers as to how much of this delta change will be enforced, taking prices from x to x+delta.
Olefins used to be that way, too, along with NGLs and crude.
Opaque olefins contracts rely on transparent spot market prices
Ethylene is still mostly a market that operates on contract pounds supplied to consumers. The pricing of those pounds, however, is more transparent than it is for resins. Until the 1990s, ethylene was priced exactly as the resins markets are described above. In the 1990s, the disclosure of a national “Net Transaction Price” was made, and it was a coda to match the agreed deltas each month. (”February is up 2 cents, so NTP is now 35 cents.”) At the close of the 1990s, NTP began to represent a pre-discounted price, which made the “Net” part of its name untrue. Contracts began to evolve further, and a concept was introduced in the 1990s called the Virtual Cracker Contract (or V-Cracker). VCracker contracts were based solely on cost, putting the buyer of ethylene in the role of producer, using benchmark spot price averages for raw material costs. The formula-based contract was born. Other formulas began to emerge, such as one called a “70/30″ which was the use of the NTP for 70% of the contract price and a spot market price average for a particular month for 30% of the contract price. The “Transaction” part of the NTP mechanism was also becoming untrue.
Today, many ethylene contracts use a formula that involves a component of raw material costs, a component of the spot price average and the NTP. At this point, the “Price” part of NTP began to lose relevance to the term as NTP had become a factor of a price and not a price itself. Some contracts in 2008 eliminated the NTP factor and based formulas completely on a combined average of costs and the spot market price average.
Propylene has been down a similarly murky road, but its unique relationship to the refinery gives it more upstream clarity. Propylene is initially extracted from the propane stream from a refinery or from the heavier NGLs processed at a steam cracker. As a direct by-product of propane, butane or naphtha, its value is often derived from the crude stream. For this reason, the extracted raw material is called “refinery grade” propylene. It can be used as a feedstock for alkylate (a gasoline octane booster) or upgraded in splitter to become a more pure grade of propylene.
When it gets to the resin monomers, however, it’s much like the ethylene story. Propylene in its “raw form” (when it is extracted from the refining stream or cracking process), must be processed to remove impurities. The purest processed form of propylene is Polymer Grade Propylene. Its supply is nearly 100% contracted and prices are derived from either a Posted Contract Price or on a formula that places a premium on a spot average price for its immediate raw material, Refinery Grade Propylene. The Posted Contract Price is derived the “old fashioned way” — a monthly delta nomination is issued and a new price is negotiated based on that delta. Unlike polymers, the PGP Contract Price is well known, and is openly talked as a pre-discounted price. (”April PGP increased 4 cents to 69 cents, so with a standard 7% discount, most people are paying around 64 cents.”) Increasingly, the more liquid Refinery Grade Propylene spot average price is used as a basis for a simple contract formula, such as RGP + 4 cents.
Upstream transparency illuminates downstream contract prices
In February 2008, when the resin contract pricing revolution began, the first suggested substitute for a contract formula was to use the price of the ethylene or propylene monomer and add a margin to that. But what’s the price of ethylene? NTP? Surely not. How do ethylene merchants value their ethylene?
Looking at the new type of formula described above for ethylene, what’s clear is the need for two things: the price of ethylene’s raw materials (such as ethane) and the spot price average for ethylene. The combination of ethylene’s raw material price plus ethylene’s average price in the spot market appears to be finding some ground in the world of resins contract pricing.
Information – everyone wants it, but who wants to give it?
At the same time, opening up the flow of information is often a bell that cannot be unrung, and ringing it is a daunting challenge for many. Where is the line between providing information and encouraging collusion, many wonder. Where is the line between reporting your market movements and disclosing proprietary information, or possibly trade secrets?
The answer is found in the spot markets. Reporting spot market information damages no one, and protecting identities of those trading is essential to preserving the integrity of market competition. Looking at the market paragon, crude futures, discovery of anonymous transaction information enables markets to function. Anti-trust law is rooted in preventing collusion, which should scrutinize the potential for sharing of company strategy with market competitors.
Most anti-trust cases are solely focused on improper sharing of supply contract information. For this reason, it is clear that markets based on negotiated contract programs are at a greater risk for crossing the often blurry lines of what constitutes a trade secret. This is nearly never the case in the spot markets.
In short, your contracts are your business. The spot market is a vital tool.
Twenty years ago, the move for natural gas liquids to trade openly in an OTC market gave rise to the broker market, the paper market and soon all contracted NGL supply was priced on the spot average for particular monthly. Trusting in the continued availability of consistently accurate information enabled those markets to evolve, and this evolution has moved into the olefins markets. Increasingly, resin buyers know the price of the cost chain as information becomes more accessible.
The thirst for information is a sign of evolution
This accessibility is what is at the heart of the PetroChem Wire’s success. We know where ethylene and propylene last traded and were last bid and offered. We know where ethane and propane closed, and we know where crude closed. The move to disclosing firm bids and offers for resins has been greatly facilitated by The Plastics Exchange, the only public trading platform of resins that currently exists. Knowing the spot ranges for resins completes the picture that makes for a daily snapshot of the chain.
As resin market participants gain a greater understanding of the real-time price changesaffecting their supply chain, the fear to disclose information more freely will fade, if history is a guide. Information is the cornerstone of power and its increased use is the agent of market evolution.
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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:
Kathy Hall, Executive Editor
+1 720 480 6288
kathy@petrochemwire.com
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Copyright 2008