29 September 2003 12:11 [Source: ICIS news]
|BP's Iain Conn|
Chief executive Iain Conn described the industry's current pricing mechanisms for naphtha, olefins and polymers as "frankly perverse".
In a wide-ranging speech addressing the industry's view of competitiveness in Europe, Conn said here that unnecessary margin volatility was created by pricing naphtha in real time, often with extreme volatility, and setting polymer prices on a monthly basis.
"Under such circumstances it seems quite illogical for ethylene producers to sandwich a quarterly mechanism between two more liquid and real-time markets," he told delegates at the 37th annual meeting* of the European Petrochemical Association (EPCA).
Conn said the unnecessary margin volatility either side of ethylene was compounded by the influence that the ethylene price setting mechanism has on behaviour through the value chain. He argued that it has an effect on market psychology regarding future prices of polymers and other derivatives. "It can induce excessive swings in the purchasing, offtake and stock levels in the value chain," he said.
"We expose participants to significant price and volume risk without commensurate margin compensation or the ability to manage that risk," he insisted. "That's a bust in my book."
Conn said the solution, at the very least, was to switch to monthly pricing - a move he regarded as only an interim position.
UK-headquartered BP tried - and failed - last year to persuade European players to adopt a monthly ethylene pricing mechanism, with independent and non-integrated buyers in particular opposed to a change in the status quo. But Conn said later at a press conference that he remained convinced it was a vital part of making the European chemicals industry more competitive.
Conn continued in his EPCA address to urge a major reform in the number of polymer grades sold, arguing that the wide range of undifferentiated products added complexity, raised costs without an obvious reward and, more significantly, became a barrier to the establishment of a limited number of reliable marker prices for polymers.
He said that to achieve prices that could be relied upon for investment decisions, the industry needed to better differentiate between commodity and specialty polymer grades and to eliminate spurious grade differences. Conn said that by rationalising grades the industry could also improve logistics efficiency.
"At present," he said, "we have the absurd sight of cargoes of near identical material criss-crossing Europe every day. This makes no sense, either in terms of haulage charges, the environment, or indeed the human cost in terms of accident and injury."
Conn added that the elimination of false grade differences would allow physical swaps to become an even greater feature of the industry.
"If we can make these changes - more flexible pricing and grade simplification - then I believe we can significantly raise our game in Europe - in this industry and beyond."
Conn's call for chemical pricing and grade reform was among a number of measures which he argued would allow companies to compete effectively with growing competition from the Middle East and Asia. Other measures included increasing the risk management tools available, investing prudently, enlisting public support for a rational programme of regulation, and - above all - recognising and reacting to the changing business environment in line with individual company circumstances.
*EPCA 2003 runs through Tuesday.
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