INSIGHT: The PX ACP, an 'age-old' legacy system?

13 December 2010 12:29  [Source: ICIS news]

By Bohan Loh

SINGAPORE (ICIS)--The debate over the paraxylene (PX) Asia Contract Price (ACP) remaining as a reliable and trusted pricing benchmark rages on, even as buyers and sellers near the conclusion of negotiations for 2011 contract volume deliveries.

“It’s really an age-old system and discourages the development of liquidity in the Asian PX market,” said a Middle East-based producer.

An official from Sinopec speaking on the sidelines of the recent PX-PTA Summit in Zhuhai, China, said: “The ACP is always skewed either way depending on the supply-balance conditions at the time of negotiation. Deeper considerations should be given to both feedstock costs as well as downstream profitability.”

The monthly PX ACP is negotiated between three producers, JX Nippon Oil and Energy, Idemitsu Kosan and ExxonMobil Chemical, and five buyers - BP, China American Petrochemical (CAPCO), Oriental Petrochemical Taiwan Corp (OPTC), Mitsubishi Chemical and Mitsui Chemicals.

It is also widely considered as a benchmark price on which almost all term supply contract formulas are based and is usually settled in the last week of the preceding month.

Despite the discontent over the system, pioneered by CAPCO and Japanese producers in 1997, the ACP will remain an important benchmark for 2011 term contracts. Most contracts have been finalised at parity to 50% ACP:50% spot average of published cost and freight (CFR) Taiwan prices.

ExxonMobil Chemical’s move to include a spot-price element to its 2011 term formula undermines the ACP benchmark, market sources close to the company have suggested. ExxonMobil Chemical is a major PX producer and a key negotiating party to the benchmark ACP.

It has proposed a 70% ACP:30% spot average of published CFR Taiwan prices, as a term formula for 2011 to the relevant ACP-linked buyers, instead of a 100% ACP formula base.

“I think they just want a higher monthly settlement to recover some of the losses incurred earlier in 2010,” said a northeast Asian end-user.

“It is a global practice that all our product prices are communicated directly to our customers.... The pricing of ExxonMobil Chemical’s products are agreed upon directly between our customers and ourselves, based on commercial terms and market factors, and independent of other producers,” said Karen Wong, a media relations and communications adviser with the company.

A recent four-year study of Asian PX settlement prices conducted by ICIS showed that contracts settled on a 100% ACP basis were the lowest among industry-accepted formulas.

The ICIS study was based on comparisons between 100% ACP; 50%:ACP 50% spot average of published CFR Taiwan prices; 75% ACP:25% spot average of published CFR Taiwan prices; and 70% ACP:30% spot average of published CFR Taiwan prices.

A sole end-user was said to have accepted ExxonMobil Chemical’s move to include a spot price variable in its contract formula. Other major buyers remained in negotiation.

ExxonMobil Chemical, JX Nippon Oil and Energy and Idemitsu Kosan traditionally sell their contracted volumes to the relevant ACP-linked buyers on a 100% ACP basis. The monthly settlements between Asia’s major buyers and sellers eventually developed into a benchmark price for all other market players.

Apart from an attempt to capture a higher monthly settlement price with its buyers, most market players have not fully grasped the reason for ExxonMobil Chemical’s move for spot price inclusion.

“They are undermining their position as a key ACP negotiator. I don’t know if the market is going to fully recognise any settlements by them in future,” said another northeast Asian end-user.

Another market observer said: “It could be because Exxon could be losing faith in the ACP system to yield a sustainable and representative monthly price. An ACP-seller typically has no other choice but to ‘follow’ the initial settlement even if they do not find the price to be acceptable.”

ACP-linked buyers and sellers generally "follow" the first settlement of each month, if deemed reasonable, to minimise confusion and maintain the reliability of the existing ACP system. Thus, there is usually only one price per settlement month.

JX Nippon Oil and Energy and Idemitsu Kosan have mostly finalised 2011 term contract volumes with the relevant ACP-linked buyers at parity to 100% ACP.

New entrants to the monthly ACP negotiations could potentially cause confusion to the benchmark settlement.

South Korea’s S-Oil will nominate a January 2011 ACP in the week to 24 December and will then begin monthly negotiations and settlements with the relevant ACP-linked buyers apart from Mitsui Chemicals.

China’s biggest PX buyer, Yisheng Petrochemical, would also be roped in as part of the negotiation process with Idemitsu Kosan and ExxonMobil Chemical, as well as S-Oil.

“Settlements by both S-Oil and Yisheng Petrochemical will not be fully recognised as the ACP next year. It will take some time for the market to begin benchmarking against their prices,” said one major buyer.

The repute and previous “willingness” to follow and recognise initial and major settlements are also part of the considerations of other ACP-linked buyers and sellers in recognising new entrants to the monthly negotiations, they added.

However, more than one settled price could emerge and cause confusion for the rest of the market. In June 2009, two sets of negotiations were concluded for PX at $990/tonne (€752/tonne) CFR Asia and $1,010/tonne CFR Asia.

The settlement at $1,010/tonne CFR Asia was subsequently withdrawn but some contracts for the period remained unsettled while buyers pushed for the lower settled price and sellers insisted on the higher value.

In addition, Yisheng Petrochemical was known to have refused the ACP in September 2009 when spot prices fell below the fully settled contract price for the month.

“That past event will definitely have an impact on how the market views Yisheng Petrochemical as a reliable benchmark,” said a Japan-based trader.

While the current ACP system is said to be “age-old” and discouraging of liquidity, most end-users remain averse to high levels of exposure to spot prices due to excessive basis risk.

The Asian PX contract market has moved, over the years, to include a higher spot weighting, with the 50% ACP:50% spot average of published CFR Taiwan prices being the most popular formula.

The ACP portion is generally seen by buyers to be a protective measure against rising prices and a low basis risk pricing mechanism, while the spot portion allows them to take advantage of any downswing in prices. The opposite scenario is then applicable to PX sellers in the region.

“There is trust that since the PX ACP is negotiated between large and long-term buyers and sellers, the process would yield a sensible and sustainable number,” said a northeast Asian-based end-user.

“As much as people like to complain about the ACP, it will still remain as the benchmark for quite some time to come.”

($1 = €0.76)

To discuss issues facing the chemical industry visit ICIS connect

By: Bohan Loh
+65 6780 4359

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