Price and market trends: Europe's evolving MEG contract price mechanism

18 October 2013 09:42  [Source: ICB]

Players in the European monoethylene glycol (MEG) contract market have been expressing an interest in redefining the monthly contract price mechanism, sources said on 10 October.

“The key is participation, timing and commitment in the end to do it,” a seller said.

The industry has been increasingly dissatisfied with the process, which frequently ends up in delayed settlements and sometimes double month agreements.

“We need a timeframe, but it all just drags on,” a second seller said.

Markets can change dramatically in the space of a few weeks as for example, when peak demand seasons stop or start, often promoting a state of stalemate.

“Timing is important…We can’t live without a contract price. There should be more parties involved in settling,” according to a buyer. The buyer went on to explain how a delayed agreement forces the market to take an estimated contract value only then to correct it three months down the line. “We should use ethylene as an example,” a third seller suggested. Timing discipline is key to the ethylene contract price mechanism’s success.

At present, MEG sources use a variety of reference points, whereby some use two-month old prices and others only take the previous month’s prices, for example.

Indicators such as exchange rates, cost of production, European and Asian spot prices, the European and global market balance, as well as the conditions of the past month versus expectations for the current month should all be taken into account, players agreed.

The question then arises of how much influence each of these should have on discussions.

Parity with Asia is hugely important for the net importing region of Europe. The Asian spot price should therefore have more influence than the European spot price, a second buyer said.

A contractual importer is likely to put less emphasis on local production costs than domestic producers are. Were the industry to consider how best to help in the evolution of the contract price mechanism, factors such as these would need to be thrashed out by those involved.

For some participants much of the negotiation process is spent deliberating which reference points should be considered, the first seller said.

“We have to be careful not to derail the process further…broader participation is key,” a fourth seller said earlier this week, echoing comments made by other players.

In the recent past, there have been four producers and seven customers involved in settling the monthly contract price. The industry considers it a done deal once there are two sellers and two customers who have agreed on a single gross figure.

“Considering the size of the industry and the capacity of those settling, this is hardly representing the market,” the first seller added.

There is perhaps a need to introduce an incentive in order for an agreement to be reached within a certain timeframe, but this would depend on individual companies concerned.

“I am in favour of more discipline in the price settlement mechanism,” a third buyer said.

Meanwhile, the market still awaits a final agreement for the September contract. At this stage it may well end up in a dual agreement with October and neither side is happy with this situation.

By: Caroline Murray
44208 652 3214

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