31 May 2002 14:46 [Source: ICIS news]
The first European Aromatics and Derivatives Conference,* held this week in London, highlighted the fact that commercial reality is the driving force for change in the way aromatics are bought and sold.
Producers in different parts of the aromatics chain may have different objectives but there is a growing consensus that the sector needs more tools to cope with feedstock volatility and the squeeze from downstream product pricing. Aromatics producers, even those relatively highly integrated, are caught in a value trap and certainly don’t feel that they are getting their fair share of value added.
It won’t be easy to change this situation but producers know they can get more from less by being more flexible when it comes to adopting some new, increasingly internet-based trading tools. As one speaker at the conference said, the traditional petrochemical deal structure needs to be reshaped: the industry needs more futures trading and has to look at how it can utilise back office tools, like factoring, to speed payment. The old quarterly pricing structure is changing fast.
Shell Chemicals’ Nancy Sullivan set the scene when she urged customers and suppliers to work together to minimise price volatility using tools such as hedging and internet trading. Margins halved for many businesses between 1995 and 2001 and there is little hope for respite any time soon. Over the period the price ratio of nylon to naphtha dropped from 13 to 7 and the ratio of polycarbonate to naphtha fell from 17 to 9, Sullivan said.
Volatility is the real problem. Chemical producers have had to cope with cyclicality for years but they are venturing into uncharted waters when it comes to using tools that might help them smooth out the peaks and troughs of volatile upstream market prices. These tools (risk management and futures trading) are becoming more widely available but users face a steep learning curve. The supply industry needs to overcome critical issues before it can provide a liquid trading floor.
Dow’s Tim Laughlin was looking at the issue from the perspective of a net buyer of benzene in Europe, but made the key point that volatility requires the market to develop a reference price (for benzene) in shorter time intervals. Basically, the volatility of oil and naphtha market prices has to be contained and petrochemical producers have to understand fast just what shorter price intervals might mean for them and how they can balance costs and risk more effectively.
None of this is new outside chemicals, of course, but the sector is only slowly catching on to the advantages of more effective risk management. Laughlin made the critical point that risk management can help create value if market liquidity exists and that ultimately market liquidity and transparency are the responsibility of the industry. Nothing is going to happen until the industry begins to help itself. Risk will be distributed more evenly when more players become involved and the market gains more depth.
From any perspective players have to fully understand what they want from risk management and what exposure they can live with. Certainly, company employees have to understand the rules of the game and management has to set clear boundaries. Risk management helps companies manage their exposure to risk but not necessarily manage margin and this important distinction needs to be fully understood.
The agreement in March of a monthly benzene contract price between Atofina and Dow re-ignited the debate over quarterly price settlements in Europe. Reaction then to the move was mixed: applauded by benzene buyers but seriously questioned by more integrated producers. Atofina, however, was certain that the monthly settlements would improve liquidity and better reflect market fluctuations.
Monthly pricing in benzene and upstream in olefins is a big issue in Europe now but it does become increasingly difficult to demonstrate the validity of shorter pricing settlement periods further away from crude and naphtha. In each market, producers and users have to demonstrate the value of shorter pricing periods and the validity of these reference prices over longer-term market conditions.
*organised by ICIS LOR, European Chemical News (ECN) and International eChem. Chemical Insight, ICIS LOR and ECN are all owned by Reed Business Information (RBI).
For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.
Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.
|ICIS news FREE TRIAL|
|Get access to breaking chemical news as it happens.|
|ICIS Global Petrochemical Index (IPEX)|
|ICIS Global Petrochemical Index (IPEX). Download the free tabular data and a chart of the historical index|
Asian Chemical Connections