European PET producers rethink legacy contract formula, mull spot indexation: sources

A year of supply chain delays and high freight costs, coupled with increasing utility prices, are making European virgin polyethylene terephthalate producers rethink their contract strategy for 2022, market sources said.

A producer said Oct. 28 they were moving away from the "cost-plus" formula and were not planning to renew their contracts for the next year based on this formula. European PET contracts are typically linked to feedstocks paraxylene (PX) or purified terephthalic acid (PTA) and monoethylene glycol (MEG) and contain a fixed premium part, which is renegotiated annually once a year.

An increase in raw material, freight costs and utility prices -- natural gas and electricity -- alongside structural changes in supply and demand are squeezing production margins and making it harder for the PET producers to cover their costs, sources said.

According to market sources, some brand owners and tray and sheet producers had been looking to secure virgin PET volumes to substitute recycled PET material amid worries there will be not enough supply of the recycled material to meet their needs. As a result, there will be even more interest in a material which is lacking in Europe.

Buyers will be jumping from one product to another depending on the economics and the demand, a converter said Oct. 19.

The producer added they do not believe the cost-plus formula will be the best solution for the upcoming year, as it does not represent "a win-win situation" for all the parties involved.

"You are missing a lot of costs that are hard to include in the "other part" [of a formula], which is also fixed for the year," the producer added.

However, the producer said that in case of some contracts remaining on the cost-plus formula, the "plus part" will be renegotiated every quarter, rather than once a year, while maintaining an annual consumer volume commitment.

"Producers are not accepting the "cost-plus" formula, everything [will be] based on the [spot] indices," a trader said Oct 28, adding that any contracts remaining on cost-plus would see quarterly re-negotiation.

"The market will be forced to be on spot. If the spot is tight, everything will be tight," the trader added.

Another PET producer said Oct. 27 there would be few if any contract pricing formulas linked to raw materials in 2022.

Although currently partly shielded from a full pass-through of soaring production costs, PET consumers are also being hit by higher utility bills, consumers said.

A consumer said Oct 20 that recent movements in electricity prices are "making people worried," because these changes are not captured in the pre-negotiated "plus" part of the contractual formulas.

As a result, there is an incentive for producers to either capture the electricity in the "plus" component, which implies revising formulas higher for 2022, or factor in electricity into the feedstocks cost components, according to the consumer.

"[There are] big pressures to change the structure of the contract for next year," the consumer added.