Europe PP buyers with monomer contract links under pressure for 2017

LONDON (ICIS)–Polypropylene (PP) buyers with pricing links to monomer are going to be under even more pressure in 2017, sources said on Wednesday.

“Everybody is now saying that producers won’t accept current contracts linked to monomer,” said one observer.

PP contracts linked to monomer are largely shrouded in secrecy, but many sources said propylene contract plus €300/tonne was not an unusual formula in most markets. Some sellers imposed a larger delta between monomer and polymer, they said.

“We are only just starting negotiations [for 2017],” said a buyer, “and in some cases I heard high expectations, but think at the end there will be a compromise. I don’t expect a major price increase, perhaps a small adjustment.”

Buyers have been paying a bigger delta between monomer and polymer in 2016, following the extreme situation of 2015, which left some PP buyers closing lines for lack of material.

Formula-based propylene-linked pricing that was settled at the end of 2015 for 2016 rose sharply compared to former contracts.

One such contract was legendary at propylene plus €180/tonne, and there was talk of even lower deals, but these were not confirmed.

During 2015 the spread between PP spot, and freely negotiated prices rose sharply, on the fall in the euro against the US dollar, the fall in crude oil and naphtha prices and a spate of force majeures at both the cracker and PP level that tightened supply.

At that time propylene-linked contract were a big advantage for buyers, hence the pressure to accept a higher monomer/polymer delta for 2016.

In September 2014, the delta between spot PP and the propylene contract was as low as €145/tonne, rising to €390/tonne in July 2015.

Its height was in December 2015, when the gap between propylene and ICIS low-end spot homopolymer injection PP was at €470/tonne, but in August 2016, the delta has fallen to €230/tonne.

The above chart shows the propylene (C3) contract versus the average low-end monthly spot PP homopolymer injection price.

The above chart shows the propylene contract plus €300/tonne, reflecting many propylene-linked contracts.

The above graph merges the two previous graphs.

Discussions surrounding 2017 contracts are expected to continue until the end of the year.