INSIGHT: Upstream, energy volatility drives demise of the quarterly contract

Will Beacham

22-Apr-2022

BARCELONA (ICIS)–A large scale switch from quarterly to monthly contracts is under discussion in Europe, driven by extreme volatility in upstream feedstock and energy costs.

The war in Ukraine has pushed up and boosted the volatility of oil, chemical feedstock and energy costs, making it all but impossible for many producers of chemicals to forecast for the next quarter. This has driven them to abandon quarterly contracts in favour of monthly agreements, at least temporarily, despite resistance from downstream customers.

Quarterly contracts have been in decline for many years with the Europe benzene chain switching to monthly in 2004 followed by olefins in 2009. The methanol chain has largely remained on quarterly contracts.  However, they are favoured by downstream customers serving sectors such as automotive and electronics which are tied into six month or annual contracts with their own customers.

As a result, many downstream derivatives have remained on quarterly contracts as they offer more stability and less time spent in price negotiation.

Now, major change is underway, driven by producers which have suffered a huge uptick in European feedstock prices in 2022, particularly in the styrene, propylene and ethylene chains.

For April 2022 ICIS is aware that players in Europe nylon, engineering plastics, polycarbonate (PC), butanediol (BDO), ethanol, polyacetal (POM), polybutylene terephthalate (PBT), titanium dioxide (TiO2), maleic anhydride (MA) and methyl methacrylate (MMA) markets are discussing a switch from quarterly to monthly. A move to monthly from annual or quarterly adder fees is under discussion in Europe purified terephthalic acid (PTA) markets.

RESISTANCE TO CHANGE
The move from quarterly to monthly has not been welcomed by downstream buyers which enjoy the stability the quarterly contract offers.

“The derivatives have stayed with quarterly pricing because they are selling into these long-term pricing markets such as electronics and automotive,” Barbara Ortner, ICIS head of market reporting said this week on the ICIS Think Tank podcast. “Now the pressure is on them to move to monthly but there has been quite a bit of resistance from buyers.”

For many of the products the switch from quarterly to monthly is being discussed for contracts starting in April, the beginning of the second quarter (Q2) of 2022.

“Many businesses have already implemented monthly prices for April. The question now is: how long it will stay that way – could it go back to quarterly or is this a permanent change?” Ortner added.

If high feedstock and energy costs stabilise during the rest of the year, there could be pressure for a return to quarterly contracts.

“It’s going to be very difficult for those companies at the end of the chemical chain who are selling into non chemicals sectors to persuade their buyers that they want to change their prices every month,” Ortner said.

MARKET REACTION
Although some downstream buyers in Europe are resistant to the change to monthly, there is an acceptance of the pressures producers face.

“The supplier did not agree to make long-term agreements over one month, that’s my main concern if I have to talk every month with all suppliers,” a nylon buyer said:

Another added: “From April we have a couple of suppliers pricing us on a monthly basis. They were not prepared to offer a quarterly price or what they proposed we could not accept so we moved to monthly.”

In ethanol markets a player in Switzerland said: “Several contracts have been switched from quarterly to monthly pricing. This is at producers’ request as most struggle to look two-to-three months ahead.”

According to a producer of POM and PBT: “We had some indications earlier in February for Q2 with further price adders and natural gas costs. But we are moving to monthly pricing as we cannot sustain fixed pricing with the fluctuations. This is our new way to move forward.”

A PTA trader said: “If I were a consumer or a producer I would prefer a monthly adder fee because things are yoyoing and so volatile nowadays. Everyone would be in better shape if there were a monthly adder.”

In PC markets there is resistance to change.  “Monthly contracts are a pain for us – every time PC prices change, our moulders have to readjust costs and we need to estimate new prices. It’s a process that takes a lot of time, so we would prefer to do that once every three months instead of once every 30 days,” A PC moulding-grade buyer said.

A European PC producer said: “Nothing is like in the past – it’s mayhem and the market needs to calm down to go back to quarterly contracts. If you look across the board for raw material, volatility is crazy.”

MMA markets are moving from quarterly to monthly pricing.

“There will be no quarterly price in Q2,” a buyer said. “We are moving to monthly pricing just to avoid taking too much risk on the sale and buy side because we don’t know what’s going to happen.”

A producer added: “We started some quarterly discussions for Q2 but generally positioned for an April price rather than a Q2 price. This is because trying to give a quarterly price now is difficult or loaded with caveats.”

ICIS introduced a monthly MMA contract price in 2010 at the request of the market, and since then many players have had a mixture of monthly and quarterly contracts. However, large volumes were predominantly agreed on a quarterly basis, which highlights how significant this shift may be.

IMPACT OF RECYCLING, CIRCULARITY
As recycling plays a more significant part in chemical production, and more local circular supply chains develop, some argue that there will be a greater need for more local pricing of feedstocks and chemicals.

Also speaking on the Think Tank podcast, Paul Hodges, chairman of New Normal Consulting, said: “Recycling isn’t going to involve shipping product around the world; it’s not really going to involve even shipping products around countries. You’re going to have to have a local pricing basis that rewards the waste collectors and cities for setting up the processes for recycling and making it all work efficiently rather than just throwing it in landfill.”

ICIS has developed a wide range of price reports for recycled polymers and adds new assessments to its petrochemical reports to reflect new ways of trading.

In Europe and the US around 80% of chemicals are sold on long term contracts, with 20% on spot. In Asia almost all business is spot.

Insight article by Will Beacham and Katherine Sale

Marta Fern, Nazif Nazmul, Yashas Mudumbai, Heidi Finch, Caroline Murray, Miguel Rodriguez-Fernandez, Jane Massingham, Anne-Sophie Briant-Vaghela and Mathew Jolin-Beech contributed to this article.

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