INSIGHT: When contract settlements don’t work

17 October 2011 14:48  [Source: ICIS news]

By Bohan Loh

SINGAPORE (ICIS)--The potential “non-settlement” of the October paraxylene (PX) Asia Contract Price (ACP) exposes the inadequacies of the most important benchmark price in the region.

Nearly all PX term contracts in Asia are inextricably linked to the monthly negotiated ACP and are settled off the benchmark price.

CBI Consulting (an ICIS service in China) has recently estimated that around 85% of PX in Asia is traded against the ACP in differing weight-age to spot CFR (cost & freight) Taiwan assessments (see table below).


ACP

100%

ACP & SPOT

Spot (50% & >)

ACP & SPOT

Spot (about 30%)

OTHERS


2008


18-20%


Increasing


Declining


Balance


2009


About 18%


About 60-65%


< 10%


Balance


2010


About 18%


About 60-65%


< 10%


Balance


2011


About 20%


About 60%


≤ 5%


Balance

*source CBI Consulting

A sole settlement for the October contract price was reached between Japan’s Idemitsu Kosan and China’s Zhejiang Yisheng Petrochemicals at $1,620/tonne (€1,166/tonne) CFR Asia at the end of September. A settlement between Zhejiang Yisheng Petrochemicals and South Korea’s S-Oil was also heard at the same price on 13 October.

But the two price settlements have been rejected by key buyers, who say that margins for downstream purified terephthalic acid (PTA) producers are too thin to support this price.

Negotiations between US-based ExxonMobil and its customers remain in a stalemate. An official from S-Oil said it was still trying to come to a settlement with its other customers. Japan’s JX Nippon Oil & Energy and Idemitsu Kosan have ceased negotiations with their customers and will be looking towards spot CFR Taiwan quotes as a “fall-back price” for contract settlement.

However, there are other market players who do not have a pre-agreed “fall-back price” calculation method in their term contracts and who have questioned the reliability of the price settlement benchmark.

“We are left in limbo and we don’t know how much to invoice our customers,” said a Middle Eastern PX producer.

“This episode reflects the inadequacy of the ACP system. I may propose to all term customers to use 100% spot as term,” it added.

“We don’t have another way to settle our October contracts and we will just have to wait until an ACP emerges before we can proceed,” said an Indian PX maker.

The failure of key buyers and sellers to reach a consensus on the PX ACP has global implications, because settlements for two other PX contract benchmarks in Europe and the US have been delayed.

European and US players in the PX and PTA markets typically look to the monthly ACP settlement for price direction because most demand is in Asia

Players in the western markets have become frustrated over the lack of direction for downstream PTA and polyethylene terephthalate (PET) prices.

Some Chinese players were heard contemplating the use of the sole $1,620/tonne CFR Asia settlement as a “temporary contract price” and said they would apply an adjustment later in the year if a clear October PX ACP emerges.

Other market players also had previously questioned if monthly negotiations between a select group of buyers and sellers would be able to yield a fair, representative and sustainable price for the Asia PX/PTA sector.

A Sinopec official was previously quoted as saying: “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 ACP faced numerous contentious settlements in 2007 and 2008. They prompted the emergence and subsequent popularity of the 50% ACP plus 50% spot FOB (free on board) Korea/spot CFR Taiwan contract formula among regional players largely because of the lower ACP component.

Before the period of contentious ACP settlements, most contracts were settled against 70-80% ACP plus 20-30% spot FOB Korea/spot CFR Taiwan quotes.

A number of players including the key ACP negotiator, ExxonMobil, have shifted away from relying on a 100% ACP formula to sell their material.

ExxonMobil began selling its PX on an 80% ACP plus 20% spot CFR Taiwan quote formula from 2011. It was heard to have plans to further increase the spot price component with some of its customers in contracts for 2012.

Similarly, officials from Aromatics Malaysia Sdn Bhd (AMSB) have announced the intention to implement a formula that would capture a spot component.

“Desperate times call for desperate measures. If [there] is no major settlement [for the October PX ACP], we have to seriously look [at the] ACP mechanism in the new world order,” said a Singapore-based trader.

($1 = €0.72)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections


By: Bohan Loh
+65 6780 4359



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