Asian CP loses ground

01 March 1999 00:00  [Source: ACN]

. . . The overcapacity which spawned the Asian paraxy lene contract price has also sounded its death knell

The concept of an Asian Contract Price (ACP) for paraxylene (PX) is dead for now, say market players. Less than two years after widespread use of the term started, the price it represents has lost credibility.

Quarterly contract negotiations are in chaos because of dismal markets and disappearing margins throughout the polyester chain. It is already March, but no PX contracts have yet been signed. Throughout last year, it became common for contracts to settle after the quarter ended.

The confusion is also stalling domestic contract settlements in South Korea, which are based on Asian contract settlements.

Many suppliers and buyers expect Q1 contract prices to settle at close to US$250-260/ tonne cfr Asia, US$50-55/tonne below the announced ACP.

Contract prices for Q4 settled at US$280-290/tonne cfr Asia, US$40-50/ tonne below the ACP of US$330/tonne cfr Asia.

Buyers and sellers admit market intelligence is inadequate. Most say they are unsure where their competitors or suppliers really stand in talks and many expect it to stay this way for the rest of the year.

For more than a year smaller buyers have awaited the outcome of negotiations with purified terephthalic acid (PTA) majors in Taiwan before settling contracts.

Because of the muscle of Taiwanese buyers, smaller buyers would follow those settlements so that effectively there was basically one price - the ACP - with discounts for large volumes.

That is no longer the case because of the lack of confidence in the ACP, said market players. 'All users are negotiating individually and no one knows what is really going on,' said one Taiwanese buyer.

The ACP appeared at the end of 1996 as most contracts in Asia lost the link with the US contract price (USCP). For most of the 1990s Asian contract prices were negotiated as the USCP plus or minus an alpha. By mid-1997 Asian contract prices had settled for the first time ahead of the USCP and the term ACP was well established in the jargon of market players.

Increased capacity in Asia gave the market enough momentum to break away from the traditional USCP formula. Buyers especially, felt there was no reason to base Asian prices on US markets which often went counter to the Asian supply-and- demand balance.

However, the same overcapacity that helped bring the ACP into its own, was also contributing to its demise, market players said. Overcapacity will continue to get worse before it gets better. Overshadowing all startups this year is Reliance Industries' 1.2m tonne/year facility in Jamnagar, India, which is coming onstream in Q2.

Confidence in the ACP started to crumble as early as Q2 1998 when market players started to believe there were large variances in discounts being given on what most agreed was the ACP.

Some market players have welcomed the lack of transparency brought on by the chaos, if it means they might get an extra dollar of margin more than their competitors.

One producer complained when a newsletter reported the range of settlements for Q4 contracts and not the higher ACP. The supplier insisted that the true level of settlements was private and not the newsletter's business. However, buyers and sellers do not know if their competitor is the one getting the better price either, said one buyer.

Another downside to the lack of transparency is that planning becomes more complicated as negotiations drag on into the next quarter. For the South Korean domestic market, the chaos surrounding the ACP is making negotiations which were already very drawnout even more complicated.

Buyers and sellers must first take the time to determine the level of settlements in Asia before talks on domestic prices can start. Previously, they would just use what the market generally accepted as the ACP for a starting point and negotiate an alpha.

Now buyers and sellers must investigate and then negotiate what will be used as the ACP value before they can get to the real business of a domestic contract price.

'Eventually the most probable number for Asia comes along and we start working on the domestic price. We are still negotiating Q3 1998,' said one South Korean producer. 'It is a time-consuming process.'

Uncertainty over actual contract settlements is not the only reason the ACP has lost meaning. A second is the perception of PX producers and PTA buyers that it is only used to support PTA prices. 'I do not even bother looking at the ACP anymore. It's just a number used to justify higher PTA prices,' said one PX supplier.

In fact, the troubled PTA market is one of the major reasons the ACP is not working, said market players. 'It's so hard to settle a contract price for PX when the PTA price is changing week by week,' said one PTA producer. PTA spot prices were at US$290-295/ tonne cfr China with 90 days credit before the Lunar New Year holiday in February, down US$30-40/tonne from December.

Traders were bidding for February-lifting PTA cargoes at US$260/tonne fob Korea. However, producers are attempting a price hike for March spot cargoes and for Q2 contract cargoes.

Market players say that with spot prices at these levels it is anyone's guess how low PTA contract prices for Q1 will finally be settled. However, it is guaranteed to be far below the Q4 1998 list price of US$385/ tonne cfr Asia, they said.

Q4 1998 PTA contract prices were close to being finalised at US$340-360/tonne cfr Asia as ACN went to press.

In this rapidly changing environment the ACP for PX becomes obsolete before any contract is signed.

And market players agree that this will not change until the market improves for all the products in the polyester chain.

1999 paraxylene startups ('000 tonne/year)

Company Location Capacity Date

Ibn Rushd Yanbu, Saudi Arabia 375 Q2

Exxon Chemical Si Racha, Thailand 350 Aug

Reliance Industries Jamnagar, India 1200 Q2

Source: ACN

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