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EPCA: Widening European styrene spot discount to contract price prompts 2020 rethink

Berlin — An increasingly steep discount between the spot and contract European styrene prices could cause a fundamental change in the way contract volumes are priced in 2020, according to buyers and sellers attending the 53rd annual European Petrochemical Association meeting in Berlin.

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A rise in imports and weak demand have weighed on the European spot market in 2019, resulting in a growing disconnect between the spot and the industry-settled contract prices. In response, buyers are said to be pushing for amendments to 2020 contract formulas to reflect more spot pricing elements.

Styrene contract volumes are typically negotiated annually, with pricing determined monthly through the industry contract price (CP) mechanism, usually at a pre-agreed discount expressed as the CP minus a fixed percentage. Participants look to the relationship between spot and contract prices throughout the year as a measure of relevance for these contractually agreed discounts.

In 2017 and 2018, spot prices averaged 12.3% and 14.8% below contract settlement prices, whereas this year the average stands at 16.7%, S&P Global Platts data shows. Negotiated contract discounts were said to be in a range of 12%-15% in 2019, with buyers heard to be seeking wider discounts in 2020.

"The industry wants more flexibility in their contracts," the first trader said.

STYRENE MARKET FUNDAMENTALS

The European styrene market has been largely bearish since the second quarter of this year, following an influx of US imports, as market participants sought to bolster inventory levels amid European maintenance. At the same time, downstream demand has waned, which has done little to clear volumes in the styrene market. Polystyrene demand has tapered off, with market participants relying on material purchased earlier in the year. Meanwhile, regional acrylonitrile-butadiene-styrene demand has been sapped by weak end-user consumption and imports from Asia amid an open arbitrage window.

The regional styrene contract price rose Eur92/mt in September from August, with a rise in feedstock benzene prices the key determinant. However, styrene sources believe the increase does not reflect the relatively weak, oversupplied market. "We are getting mad contract price settlements which do not really reflect the spot price. There is a huge delta between spot market level and the contract price," the second trader said.

Spot prices were trading around $980/mt at the start of September, compared with a contract price settlement of $1,191/mt (Eur1,086/mt), Platts data show.

On Monday, the spot price was assessed at $960/mt while the October contract price settled at $1,160/mt (Eur1,065/mt), a 17% discount.

As term contract price negotiations for next year begin, counterparties are looking to incorporate a greater spot component into their agreements.

"We are already getting started, we have to get creative; not normal regular formulas," the second trader said.

BENZENE CONTRACT PRICE SETTLEMENTS KEY DETERMINANT FOR STYRENE

Benzene prices had been on a gradual uptrend since the beginning of the year, buoyed by production issues that tightened prompt availability and increases in prices in the upstream energy complex.

Styrene is derived from benzene and ethylene, however, benzene is the main feedstock, accounting for 79% of its molecules.

Benzene price movements have been a key determinant for the styrene contract settlement as contract counterparties account for feedstock cost increases.

In September, the styrene-benzene spread fell to $123.50/mt, the lowest level seen since 2012. The spread remains well below the breakeven level of $250/mt.

STYRENE IMPORTS LENGTHEN EUROPEAN SUPPLY

European styrene supplies have been ample following the surge of imports.

Imports totaling 445,974 mt arrived in the first seven months of 2019, an increase of 274,212 mt compared with the same period in 2018, according to the latest Eurostat data.

The rise in imports was driven primarily by antidumping duties (ADDs) imposed on Chinese styrene imports by the US, Taiwan and South Korea in the second half of 2018, resulting in new trade routes. Imports from three key countries have risen significantly - the US, Saudi Arabia and Russia. US imports have been the most significant factor, rising 71% year on year to 254,986 mt from 149,509 in 2018.

EUROPEAN DOMESTIC, EXPORT PRICE DIFFERENTIAL?

One styrene seller attributed the gulf between contract and spot prices to a price differential between inland and export volumes.

"From my point of view, one of the reasons is that sales to distributors/traders for export purposes are being reported and considered as part of a European spot price. As a consequence, the delta between CP minus X and spot increases further. I think one can say that we have a European spot price and an export spot price," a producer said.

However, styrene traders were quick to dismiss this logic, stating that there was no difference between domestic and export prices.

The European spot market trades FOB ARA and FCA ARA bids, offers and trades specifying EU-origin are sometimes heard in the market. Platts assesses on a FOB ARA basis and normalizes EU origin indications to an open origin specification.

-- Olu Shaw, olu.shaw@spglobal.com

-- Edited by Keiron Greenhalgh, newsdesk@spglobal.com