Europe’s growing disconnect between contract and spot prices

LONDON (ICIS)–The disparity between contract and spot prices has been a major factor for chemicals producers in Europe, and persistent weak demand and international competition could continue to weigh down operating rates.

• Spot prices falling more significantly than contract agreements
• Trend is significant across various chemicals markets in Europe
• Contract-spot price split differs between various products

The widening gap between contract and spot prices is adding fuel to the fire of an already challenging and fragile business environment for the industry across a range of products.

CHASM BETWEEN SPOT AND CONTRACT IN OLEFINS VALUE CHAIN
In the olefins markets – a key building block for the chemicals industry – contract demand has gradually reduced to minimum volumes.

Ethylene and especially propylene supply became lengthy and, with limited storage capacity in Europe, sellers tried to incentivise buying interest by offering spot volumes at deep discounts to the prevailing contract prices.

For ethylene contract prices have fallen about 30% year on year in July, while spot pipeline prices have dropped by 47%. Propylene contracts fell by about 38% compared to the 46% drop for spot polymer grade prices in the same period.

The difference has been more significant in the downstream monoethylene glycol (MEG) market with bulk spot prices dropping approximately 25% and truck spot prices sliding 20.5% in six months. Meanwhile MEG contract prices have only dropped 3.7% since January 2023, according to ICIS data.

Another olefins derivate, acrylonitrile (ACN) also highlights this trend. The contract price has not fallen as drastically due to less dramatic decreases in ammonia and propylene.

Downstream demand destruction caused by ongoing economic woes have prompted buyers to renegotiate contractual offtakes for the remainder of the year. Some buyers are even considering procuring from the spot market instead to take advantage of cheaper prices on offer.

“The gap between spot and contract is amazing. For people who are buying on contract basis, it is really a nightmare,” a buyer on the situation.

AROMATICS DISCONNECT ON THE HORIZON
Styrene is also feeling the impact, although maybe to a lesser extent than many markets.

Another consequence of the wide gap between spot and contract prices was expected to be the discounts that are usually part of contract discussions in October.

One source said, “the discounts are the big discussion every year. When I started it was 10-15%. Now it’s maybe 15-20%.”

This year, participants are “either are going to increase the volume they buy on the spot formula or they will want a bigger discount.”

The knock-on effect is that some buyers are looking to renegotiation contracts to get prices down, something that the acrylic acid and acrylate esters markets are also facing.

A trader said, “we do hear that some customers trying to renegotiate contracts with suppliers to get contract levels down.”

PRODUCERS NEED TO BE ‘MORE AGGRESSIVE’
One methyl methacrylate (MMA) trader added “some producers are going to offer huge discounts on formulas on contracts as they have lost significant market share – they are going to have to be more aggressive to stay in the market”

The acetone MMA contract market is formula related to 80% of the propylene contract price and as such has been following the downward trend in the feedstock over the last four months.

Acetone spot prices meanwhile peaked around the same time as the propylene contract’s recent high in March, driven by tighter supply and panic buying in Europe.

Since then, spot prices have drifted down, due to increased imports and poor demand, and now stand more or less on a level pegging with contract prices.

Many downstream markets are struggling and taking low contract volumes, so increasing spot offtake over contract is not so likely into sectors such as MMA and bisphenol-A (BPA).

As resounding feedback from the chemicals industry suggests that the outlook for demand in Europe could remain pessimistic for the rest of 2023, pricing pressure could continue forcing contract and spot prices in divergent directions.

Focus article by Jane Massingham

Additional reporting by Morgan Condon, Jane Gibson, Melissa Hurley, Fergus Jensen, Mathew Jolin-Beech, Nazif Nazmul, and Nel Weddle

Front page picture shows the view of the industrial landscape and skyline in Frankfurt, Germany (image credit Kurt Moebus/imageBROKER/Shutterstock)