Chemical Conversations: European Polyolefins Contract Pricing

Author Argus

James Elliott, talks to polyolefins experts Alex Sands and Sam Hashmi about European polyolefins contract pricing, including insights on:

  • October contract price settlements and early indicators for November
  • Why we had to wait several days for the November ethylene and propylene settlements and what this means for PE and PP
  • What the latest electricity prices mean for polyolefins costs and margins
  • The Argus contract price methodology and why it doesn’t include energy surcharges

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Transcript

Good Morning and Good afternoon. Welcome to this "Chemical Conversations" podcast on the polyolefins markets in Europe brought to you by Argus Media. I'm James Elliott, Business Development Manager for European Chemicals at Argus and I'm joined by Alex Sands, Senior European Editor from our Chemicals business, and Sam Hashmi, Global PP Editor.

Hi Gentlemen.

JE: Sam, can you set the scene for where our October price settlements settled first of all …

SH: October marked something of a turning point with the first increase in contract prices since April. This also came despite falls in the monomer settlements for October. Producers took a firmer stance on recovering, or at least preventing further declines in their margins. Largely as a result of the higher electricity costs. Now, these electricity costs have historically been relatively stable and a small part of their costs, but with recent increases, they had quite an impact on producers’ margins. There was still a mixed picture on contract settlements in October, with some buyers insistent on decreases and others accepting additional electricity charges proposed by producers in full. In most cases, the settlement fell somewhere in between. This left Argus price markers for European contracts on PE between 1415 for HDPE, 1585 for LLDPE butene and 1775 for LDPE, before any discounts. In polypropylene, homopolymer and copolymer contract markers were at €1505/t and 1575/t, respectively, again before discounts.

JE: Alex, for the upstream side to polymers we had to wait several days before the ethylene and propylene settlements for November were known. What was going on?

AS: Hi James, indeed it was unusual that we had to wait until the 3rd and 4th of the month to hear where the monomer contracts were headed. While some public holidays in parts of Europe contributed to the delays, they really reflected the challenging market situation as participants struggled to reconcile the challenges of weak demand, higher energy costs and slim or even negative margins in parts of the product chains.

From a market balance perspective, maintenance and cuts in operating rates helped to bring the ethylene and propylene markets into better balance in October, compared with recent months. Producers feel in a better position for November, even with expectations that some crackers – and for propylene some on-purpose propylene units will return during the month from maintenance. They started negotiations individually seeking increases in line with the average rise in naphtha prices over the past month - euro51/t by Argus naphtha assessments - to protect slim cracker margins.  Buyers mostly sought a rollover, with a few seeking large decreases, concerned that any increase would be difficult to pass through to their customers, would further depress margins and would reduce competitiveness with other regions, curbing their own production levels.

 

Compromises were inevitable and while there was not a wide consensus on the outcomes, at least settlements were reached with a partial pass through of higher feedstock costs – a €35 increase for ethylene and a €20/t increase for propylene, reflecting slightly more pressure on the propylene balance.  Unfortunately no parties will be fully satisfied - the increase will be difficult for derivatives to recover while not being enough for producers to maintain margins. The time it took to find a compromise is a measure of how difficult the market is and how critical the issues of margins and cost are, both upstream and down the supply chain. These monthly negotiations are unlikely to become easier in the short term while demand remains weak and margins thin.

 

JE: I suspect some similar issues are playing out in the polymer settlements for November. What are the early indications you are seeing for November contracts Sam?

 

SH: Rightly so James, there are indeed similar dynamics at play in the polymers space. Most producers have disciplined their plants’ run rates to around operational minimum levels, and that has helped them with manging some of the oversupply amid the demand weakness being felt across the chain. And producers have sensed that buyers have largely concluded their destocking efforts and now need to replenish inventories to baseline levels. So many producers have stepped forward with asking for increases of around €50/t on November contracts. Although electricity prices have been lower recently, producers are still coming to terms with the impact on their margins, or losses in some cases, and that is a big reason they do not see room to concede more on price against feedstocks. And the second reason is producers could see this as a short window before potentially facing a double-edged sword in the first quarter of 2023, in the form of further competition from imports and demand depression deepening in the worst case.

 

For now, as expected, buyers are pushing back against producers’ efforts and are trying to contain their contract prices to rollovers. Buyers argue not being in a position to pay-up for polymers given the uncertain and gloomy economic environment, where consumer confidence is at its lowest in decades. So buyers remain cautious in their contractual offtakes and are procuring close to their absolute minimum requirements, knowing that any extra volumes can be sourced with ease at competitive prices. And they were also equally impacted by the higher costs on electricity, which has put many converters in a difficult position to maintain the profitability of their operations.

 

But to wrap up with a slightly positive development for the industry, I would like to mention that electricity prices have eased from their earlier seen peaks. To quote examples, the Argus month-ahead assessments have averaged at €263/MWh so far in November, compared to €305/MWh in October and a whopping €408/MWh before that in the second quarter. Of course this is still far higher than historical prices around the €50/MWh level before last winter. So let’s see if electricity prices continue falling closer to their lower historical averages, or if the genie remains out of the bottle this winter. 

 

James: If I could return to the subject of energy surcharges. Are these taken into account in the Argus PE and PP contract price assessments? Alex - could you give us an overview of the Argus contract price methodology?

Alex: The energy crisis has certainly been something new for the markets to deal with. Previously they were a stable and relatively small contribution to costs, it was not really a factor in discussions of sales and prices for PE/PP. In recent months the impact on costs has often been even more significant than feedstocks or market balance. Many producers announced surcharges to try and recoup costs, but also as a way to simply highlight the issue to buyers. The response to surcharges was very mixed. Some customers accepted them, but others have flat out rejected them. Because of this mixed response we took the view to exclude explicit surcharges from our assessments. This was also to avoid the risk of double counting where a surcharge is included in the index and then applied on top in any indexed contracts. There is a difference in the way contracts are structured and a surcharge may be more applicable to a feedstock linked contract. But our assessments are of freely negotiated contract prices. And what we have seen in October is a move towards electricity costs becoming part of the negotiation. So in this instance we are beginning to see electricity costs affect the assessments of our freely negotiated contract deltas. This was part of the reason our October contract markers increased, despite the fragile market situation and the decrease in October monomer contracts. We anticipate this will continue, with both buyers and sellers keeping a close eye on electricity price developments and using them in their discussions. Electricity prices did decline in October and maybe something buyers will try to use in their negotiations this month. But of course they remain very high historically and prone to sharp increases depending on developments in the Russia-Ukraine war and potentially colder winter weather eventually arriving.

JE: A lot of important factors for our listeners to consider from your answers today Alex and Sam.. Thank you for sharing your insights.

If you would like a discussion about the polyethylene and polypropylene markets and how we assess prices at Argus please email us at chemicals@argusmedia.com

Thanks for listening.

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