FocusChina PTA contract mechanism criticised

04 March 2008 03:47  [Source: ICIS news]

By Salmon Aidan Lee

SINGAPORE (ICIS news)--The purified terephthalic acid (PTA) contract price mechanism in China faces serious criticism after recent delays in monthly settlements, buyers and sellers said on Tuesday.

An increasing number of producers are also looking to sell spot or based on spot-average formulae while the majors appear to want to keep the system, they added.

“The past few months were really very stressful for all of us, our customers and ourselves,” a Japanese trader who sells PTA into the key Chinese market on behalf of Mitsui Chemicals said.

“But with the settlements now, we can proceed in dealing with the future rather than being trapped in the past,” he added.

The trader was referring to the settlements of the contract prices for the four months of November and December 2007, as well as January and February.

These were $850-860/tonne (€561-568/tonne), $850-855/tonne, $870/tonne and $890/tonne CFR (cost and freight) China respectively.

Settlements were reached only last week, after protracted and often acrimonious negotiations, and not every buyer expressed satisfaction with the settlements even as late as Monday.

“We just have to do the best we can, in meeting our customers’ needs and also looking at our own bottomline,” an official from Taiwan’s Formosa Chemical & Fiber Corp, a mid-sized PTA producer, said.

“How we degenerated into such a stage, nobody can really say for sure, but we all know that the overcapacity in the market and the weak demand late last year played key roles in delaying the contract settlements,” an official from Petrochina’s Shanghai office said.

It sells Liaoyang Petrochemical’s PTA.

PTA plants had been brought onstream on an accelerated speed, with at least 13 new lines starting up in the past two years, and more would start this year.

“All you need to see is the downstream market to go into a lull, and you can see the oversupply bring down prices,” said a senior official from Far Eastern Textile, one of the largest polyester makers in the world and a major consumer of PTA.

Spot prices fell below $800 in November precisely for that reason, a trader with Korea’s Samsung Corp said.

“With the downstream market suffering from extremely high prices of monoethylene glycol (MEG), the polyester producers cannot afford higher PTA prices and so they resisted,” he added.

Since August last year, secondary polyester feedstock MEG almost doubled after a series of outages in various parts of the world, chief among them those in Saudi Arabia.

“At that time, PTA producers were already facing squeezed margins [from high paraxylene costs], so naturally we were very unwilling to lower our contract price nominations,” said a source from Samsung Petrochemical Co, Korea’s largest producer.

What followed was the protracted negotiation process to settle – or delay the settlement of – the contract prices for the past four months.

“Actually, all we could do was to sell on a tentative basis,” said a source from Mitsubishi Chemical, one of the largest merchant sellers of PTA.

“Since that’s the case, the negotiations dragged and we could not get a firm price at the end of every month,” he added.

A trader with Japanese trading giant Itochu Corp felt that the settlements in January and February had “come much faster than expected only because demand strengthened by then and many PTA makers [slashed] production in the past two months.”

The January and February settlements gained consensus among buyers and sellers much earlier than the November and December settlements.

“It was clear by mid-February, immediately after the Lunar New Year, that the February price would be $890, and the [January] price would be $870,” a sales manager with an Asia leading supplier said.

The current contract price system was clearly not working well. Such delays in settlement were not new, having at least three earlier occurrences in December 2006 and March and May 2007.

“Now, more producers are turning to selling based on spot averages published by ICIS,” said an official with Zhejiang Lianda Polyester, who buys its PTA from Taiwan in this manner.

“It’s actually easier and more straightforward, and open to less dispute and thus saves all of us unnecessary heartache,” said the general manager of Hangzhou Dao Yuan, another polyester producer.

“Otherwise, we should just sell spot and drop the contract [system]. That makes everybody’s life easier,” said a trader with Ningbo Cixi Import and Export.

Nevertheless, majors such as BP, Mitsui Chemicals and Mitsubishi Chemical seem to be sticking to the prevailing system, at least for now and on paper.

On Friday, BP proposed selling its March volumes at $950/tonne CFR China and has so far been heard to be “doing brisk trades”, said one of its customers.

“As long as other producers follow this way of selling, and as long as the majors stick to this way of selling, this system is here to stay,” a source from Indonesia’s Polyprima Karyareksa said.

“But we can almost be sure that the delays, problems and quarrels which come with it will resurface soon, for the simple reason that the market remains oversupplied and the downstream markets have seasonal cyclicality,” he added.

($1 = €0.66)

By: Salmon Aidan Lee
+65 6780 4359

< previous article(VIDEO - ICIS news Europe Lunchtime Bulletin 27 October 2009)

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.

Printer Friendly