Chem System Features Strategy For Chemical Price Forecasting

01 June 1998 00:00  [Source: ICB Americas]

The art and science of petrochemical price forecasting is based on finding the best approach to encompass the numerous factors involved in an accurate analysis. Chem Systems Inc. vice-president Bruce Pickover says his company employs a superior methodology incorporating the operating rate/margin curve to determine future prices.

Most price forecasts rely on three analytical techniques: the cost curve, the experience curve and the operating rate/margin relationship.

The cost curve involves plotting the cash costs of individual producers and their respective capacities to come up with market price based on the level at which demand meets capacity.

It assumes the price is set by the high-cost producer that remains in operation, and that plants with cash costs above the market price will shut down.

One problem with this approach is the extensive effort it takes to estimate costs for all producers and the ensuing errors that skew results. In addition, many companies continue to run plants even if the market price falls below cash production costs. The cost curve approach makes little use of historical information and cannot forecast price spikes based on supply and demand.

The experience curve stipulates that prices will decline over time because of greater manufacturing efficiencies. However, "price cycles in the chemical industry have overshadowed the trend," undermining its value as a forecasting tool, according to Mr. Pickover.

Chem Systems' method consists of independently forecasting cash costs and cash margins to get prices. Cash costs include fixed costs (labor, maintenance, overheads and fixed plant costs) and variable costs (raw materials, catalysts).

Chem Systems identifies the leader and laggard plants to calculate cash costs and determine historical cash margins. A leader plant is representative of the most efficient 20 percent of industry capacity, and a laggard plant is representative of the bottom 20 percent.

The future capacity utilization (operating) rates are estimated based on projected demand and oncoming capacity. The corresponding cash margin is taken off the historical operating rate/margin curve for a particular petrochemical. The margin is then added to cash costs of the leader and laggard plant to arrive at the projected price range.

The advantages of using the operating rate/margin curve are that it incorporates data based on historical industry margin/operating rate relationships, requires a manageable amount of data for analysis, automatically incorporates the experience curve through the leader/laggard plant models, uses the supply-demand balance and can predict price spikes.

ICIS Copyright © Reed Business Information 2009

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