22 November 2012 20:24 [Source: ICB]
Purified terephthalic acid (PTA) producers in Asia outside of China, worrying over eroding margins, have proposed a contract formula with customers across the region that is linked with prices of feedstock paraxylene (PX), market sources said.
The proposed PX-linked contract formula for next year is a deviation from the current norm, which sets monthly contracts purely based on average spot PTA prices, they said.
This move represents a "chance for surviving for the coming year" for regional producers, said an industry source.
Some Middle East and European end-users have accepted the change, with PTA cost now accounting for 70-100% of their contract formula, with the balance based on spot PTA prices, a South Korean producer said.
Asian PTA producers have been incurring losses since the start of the year because of high prices of feedstock PX, while supply has been growing rapidly in China.
At current prices, the spread between PTA spot prices and PX cost has narrowed to $50-70/tonne since late July, while the usual variable costs that most PTA makers need to break even are at around $130-150/tonne.
On 13 November, spot PTA prices were assessed at $1,085-1,096/tonne CFR (cost & freight) China Main Port (CMP). PX was at $1,558-1,568/tonne CFR CMP.
Downstream polyester makers in China and India have refused to accept the proposed PX-linked PTA contract pricing, industry players said.
"The negotiations with Chinese and Indian customers are tough," the South Korean PTA producer said.
A Zhejiang-based polyester maker said: "We received [the] new formula proposal from Taiwan and South Korean producers, but refused to discuss it further We insist [on maintaining] the current one."
Some Chinese end-users have been requested by PTA producers to use 30% of the PTA cost plus 70% of average spot to settle next year's PTA contract.
The suggested PTA cost is equivalent to PX prices multiplied by a conversion ratio of 0.665, plus a variable cost of $125/tonne. This is based on the PX:PTA production ratio of 660-670kg:1 tonne.
Based on this, Chinese end-users need to pay $26-31/tonne higher than the current spot price-based PTA contract prices to secure PTA term supply, according to ICIS.
Another option is a 50:50 PTA cost and PTA spot average in coming up with the contract price on a free-on-board (FOB) northeast (NE) Asia basis, instead of on a cost-and-freight (CFR) NE Asia basis.
The PTA cost would thus be equivalent to the PX price times 0.67 plus a $110/tonne conversion cost, a regional PTA producer said.
"I understand why the PTA producers suggest such [a] formula, but the Chinese buyers will not easily concede as it will lift their cost substantially and there is abundant domestic supply," a major regional trader said.
Massive PTA capacity expansion in China has dampened PTA prices, while supporting values of feedstock PX given the increased amounts needed to run the new downstream plants, sources said.
Some 11.8m tonnes in additional PTA capacity are expected to come on stream this year, boosting China's total annual PTA capacity by 37% to 31.9m tonnes by the end of 2012, according to ICIS.
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