Mind the gap: Widening petrochemical spot discounts to contract prices prompt rethink
2019 was a bearish year for the petrochemicals industry. With weaker-than-expected demand, additional global capacity coming online and shifting trade flows, global petrochemical prices have been under downward pressure. Nowhere was this more noticeable than in the spot market, prompting some market participants to rethink traditional contractual arrangements as contract price movements fail to keep pace with spot.
Spot prices generally react to supply and demand dynamics more quickly than contract prices, which have traditionally had a greater link to feedstock costs and are seen as less volatile.
However, the imbalance seen in supply and demand fundamentals across 2019 led to a widening of spot discounts to contract prices in many petrochemical markets, leading buyers to reevaluate purchasing habits.
Major petrochemicals markets rely on long-term contracts, with consumers and producers typically negotiating volumes and pricing mechanisms on an annual or multiannual basis. In many markets contract volumes price against an industry contract price settled on a monthly or quarterly basis, usually at a pre-agreed discount to the industry mechanism.
In 2019, spot prices in several European markets, including styrene, methanol, propylene and mono-ethylene glycol, fell below monthly or quarterly contact prices after discounts.
In the case of methanol, FOB Rotterdam spot prices were trading on average at around 30% below the quarterly contract price during the third quarter of 2019, according to S&P Global Platts data, compared with typical discount levels of 22-24% negotiated in 2019 contracts. Negotiations had focused on a busier-thanusual planned turnaround schedule, but expected supply tightness did not materialize and consumers were left paying a premium for volumes indexed to the quarterly contract price.
The low spot price environment was a feature of most petrochemical markets in 2019. Platts Petrochemical Index, which calculates the spot price average of seven widely used petrochemicals1 , hit a near four-year low of $750/mt in December, falling from multi-year highs in 2018.
With this significant decline accentuating the widening gap between spot and contract pricing, participants in a number of markets entered 2020 reviewing their business 1The Platts Global Petrochemical Index (PGPI) is calculated based on individual global product indexes with the following weight distribution: 0.32 ethylene, 0.24 propylene, 0.11 benzene, 0.05 toluene, 0.10 paraxylene, 0.05 LDPE and 0.14 polypropylene. model, either reducing contractual offtake in favor of spot volumes or renegotiating pricing formulas in contracts to incorporate spot-based indexation. Styrene and glycols exemplify this trend, while other markets such as methanol and certain olefins remain divided on whether to increase spot exposure.