Several industry participants have privately expressed frustration at the way the price of ethylene in Europe is settled, labeling the seven-year old process of settling monthly contract prices by semi-secret negotiation as "non-transparent," "flawed" and one that produces a price that "does not reflect the real market situation."
Published by S&P Global Platts and its competitors, the so-called contract price (CP) mechanism produces an industry-recognized monthly gross price by pairing buyers and sellers together who agree a price for ethylene -- the main building block of almost all plastics.
The monthly contract price is published once one buyer and seller report an agreed price that is published by a price reporting agency, such as Platts, and then that price is agreed subsequently between a second buyer and seller.
Once that second price is agreed, then it is published as settled by price reporting agencies and is referenced in purchase contracts of companies that buy large volumes of plastics.
However, some participants have expressed frustration that the actual price published is misleading as it does not reflect the price paid or received as it is void of what can be very chunky rebates.
"In our opinion, a reliable price assessment for contract prices can only be achieved with a price calculation that is purely based on real net-transaction-prices after deduction of rebates and discounts," according to one anonymous market participant who earlier this year replied to a methodology consultation by price reporting agency ICIS, a competitor to Platts.
"Otherwise, the reported contract prices do not reflect the real market situation and especially smaller suppliers and consumers are left in the dark with regard to the granted rebates and thus the existent price level in the market," the participant said.
That complaint was echoed by other industry participants last week at Europe's largest conference for ethylene buyers and sellers, who added that an additional concern was that rebates had been increasing over recent years, meaning the published price and the invoiced price are becoming more disconnected.
"The process is flawed. We have seen rebates increase and increase over the years. There are double digit rebates when years ago it was hard to get [anything like that]," one big buyer of ethylene said on condition of anonymity on the sidelines of the European Petrochemical Association meeting in Budapest.
Increasing gross prices, increasing rebates?
As the ratio of ethylene to naphtha has increased from 2.2 in 2009 to over 3 in 2016 according to Platts data and the price difference between the two rose from $200/mt to $700/mt over the same period, any concurrent rise in rebates over the same time period would see the price that is published and the price that is actually paid diverge sharply.
The issue is particularly pertinent for fast-moving consumer goods companies who adjust their purchase price of finished plastics found in products from yogurt pots and shampoo bottles to white goods such as refrigerators based indirectly on the price movement of the published ethylene contract price.
If the published price rose over that period while simultaneously rebates increased, then downstream companies would see costs increased based on the published price rather than the increased cost for their suppliers.
This has led some participants to question whether buyers in the CP process who are also big sellers of ethylene have a big enough incentive to achieve the cheapest price in the negotiations.
In a market that is based on structural, logistical and personal relationships among buyers and sellers, very few companies will speak either on the record or on condition of anonymity.
Platts contacted 17 companies that have taken part in the contract price process over the past few years to ask them whether rebates were increasing.
Almost all chose either not to reply or said they could not comment on rebates as they were a "very sensitive issue," "highly commercial" or because of "anti-trust issues."
One consumer said, "Maybe it is fair to say that discounts today are higher than in 2008-09," while one producer told Platts that rebates were "much lower than in 2009."
None gave details.
Chunky profits
Companies regard the size of rebates as closely guarded corporate secrets, but the 2013 court proceedings that oversaw the bankruptcy filing of France-based PVC producer Kem One gave a glimpse into the size of rebates offered for parties that take part in the CP process as a consumer.
According to French media reports at the time, the annual rebate given to Kem One was 13.5-13.6% by their suppliers Total and LyondellBasell.
Neither Total or LyondellBasell responded this week when contacted to confirm the accuracy of the ethylene rebate to Kem One.
Yet the criticism of the contract price comes at an acute time for participants.
Last year a collapse in the price of crude oil and naphtha coincided with a sharp rise in the price of ethylene on what was cited as unprecedented outages at steam crackers, which turn naphtha into ethylene.
This led to chunky profits for companies that own steam crackers and brought attention to the way in which contracts are agreed.
Several parties that take part in the contract price negotiations told Platts earlier this year that they were reviewing their participation in the mechanism over concerns about its perception, particularly around the fact that some buyers were also producers and that there were fewer participants regularly taking part.
Yet none could come up with an alternative mechanism to agree a monthly contract price that has a huge impact on a vast array of goods bought and sold in shops.
"The good thing about the CP is that it always delivers a price. There are many criticisms, but what alternative is there?" said one participant in the contract price process earlier this year.
ICIS, which is referenced by most companies as the provider of the contract price, has received several proposals to alter the criteria that determine when and how it publishes its contract price, according to a summary article the PRA published in late 2013.
Those include whether to limit participation to companies that are not integrated to remove concerns of a conflict of interest, to limit or broaden participation based on net short or long positions or even refusing to publish initial settlements from the market until a deal has been done among industry players to avoid allegations of price leading.
However, last month ICIS closed its latest consultation and republished the methodology without any significant change to the way in which is publishes the contract price -- a move that is likely to annoy some who seek greater clarity on what has been paid, not what has been agreed and printed.
The companies that take part in the process and were contacted by Platts are chemical companies BASF, Borealis, Celanese, Clariant, Dow, Ineos, LyondellBasell, Sabic and Sasol, oil majors, BP, OMV, Repsol, Shell, Total and Versalis, and PVC producers Vinnolit and Kem One.
