FocusUS acrylates debate contract frequency

18 September 2008 23:27  [Source: ICIS news]

By Larry Terry

HOUSTON (ICIS news)--Within the US acrylic acid and acrylate esters market, buyers and sellers are debating more than prices; many differ on whether the market is best served by quarterly or by monthly negotiated contracts, market sources said on Thursday.

Monthly contract negotiations have dominated the market since crude oil and feedstocks began steep ascents early this year.

But beyond formula contract prices, which are linked directly to energy and/or raw material costs, quarterly negotiated contracts were the rule until second-quarter 2008 when NYMEX crude oil futures began to escalate more rapidly.

That escalation took primary feedstock chemical-grade propylene (CGP) prices with it.

As sellers struggled to respond to rising energy and raw materials costs that were thinning their margins, several began to push off-quarter increases without the traditional 60 to 90-day price protection. That effectively moved the market toward monthly contracts over the mostly unsuccessful objections of customers.

But with oil prices falling by nearly 35% since early July, and CGP contracts for September poised to drop for the first time since February, will the monthly pricing that became so important to sellers during the energy cost run-up become outdated?

"These are exceptional times," a buyer said recently. "It all comes down to the volatility of crude oil and feedstocks."

According to various buy-side estimates, a quarter to half of the freely negotiated business is still in quarterly arrangements. Sellers, however, report little or no quarterly business being conducted now.

"Monthly is the new paradigm," a distributor said. "I don't see anything going back to quarterly until feedstock pricing variability can be shown to be within 5%," he said, adding that such a scenario was unlikely to be seen again.

"We're never going back to quarterly," a major producer said. "Nobody benefits from quarterly pricing, and going to monthly pricing minimises the risk for buyers and sellers."

Acrylates contracts should settle the same way the raw materials settle, he added. In the US, propylene and other feedstocks settle monthly; in Europe, quarterly contracts are the norm because that is how most propylene contracts settle there, he said.

The seller said none of its new customers is being offered quarterly pricing.

In an instance of common ground, a customer suggested that monthly contracts can benefit buyers while feedstock propylene is falling, just as monthly pricing helped sellers when propylene was spiralling upward.

A medium-to-large buyer said, however, that it believes monthly pricing will dissipate once producers "get caught up on the feedstock pressure hitting them. After that, it will revert back to quarterly because buyers simply cannot accept monthly price changes that they can't pass on to their customers."

Another buyer predicted oil prices will start to decline more significantly early next year, at which time acrylates producers would likely step up their efforts to return to quarterly negotiations.

"The buyers will accept it because it sets a favourable ceiling, and they can always spot source outside their contracts if the prices fall," the customer said.

Upstream pressure moved prices for acrylic acid and the esters up by 22-29 cents/lb ($485-639/tonne, €340-447/tonne) since late June, although second-quarter contract prices for glacial acrylic acid remained posted at 110-114 cents/lb, according to global chemical market intelligence service ICIS pricing, pending the outcome of September negotiations.

US producers of acrylic acid and acrylate esters include Dow Chemical, Arkema, Rohm and Haas, BASF and Sasol.

($1 = €0.70)

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By: Larry Terry
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