Platts is launching the indicators in response to requests from clients who are seeking greater visibility about where future olefin prices are likely to be today.
In addition, the spot market trades at a discount to future contract prices, meaning to evaluate the current price of spot, Platts needs to provide an assessment on the future value of gross contract prices.
Despite being widely published, the current contract prices for ethylene and propylene are not independently assessed prices. Instead they are industry prices based on two confirmed deals executed by four of 13 heavily capitalised energy and chemical companies.
Their negotiations are not public and the prices reached are announced as soon as an agreement is made, which is typically the last week of the month for deliveries for the following month.
This price is used in negotiations to determine the value of billions of dollars of plastics and other chemical contracts. So packaging companies and other chemical firms that produce consumer goods will only understand their future petrochemical costs a few days in advance of payment.
Using quantitative analysis tools, the Platts indicators will provide a fair price for contract tons up to a month in advance to better help converters and producers of fast moving consumer goods with their hedging and inventory management requirements.
HOW OFTEN WILL THEY BE PUBLISHED?
The PEI and PPI will be published on a daily basis and reflects value for the upcoming month. Hence for 31 March, the indicators will reflect volumes for April, while on 1 April they will reflect value in May.
HOW ARE THEY CALCULATED?
The PEI and PPI are calculated using the same variables that buyers and sellers refer to when agreeing contracts.
- The price of naphtha
- The demand and supply balance for ethylene in the market
- The price of co-products
Specifically, Platts will use the front-month swap for naphtha, and the physical prices of ethylene, propylene and benzene for the month ahead to reflect the variable production cost, the demand and supply balance for ethylene and propylene and the value of co-products, respectively.
The quantitative part of the process involves taking the 10-day averages for the four inputs on the assessment day and subtracting those from the 10-day averages of the same products on the last day of the previous month.
The delta between these two sets of numbers is then multiplied by coefficients to provide the delta on the month and that delta is then added to the PEI and PPI that were published on the last day of the previous month. This gives the daily indicators:
The coefficients are derived using regression analysis from the previous 24 monthly contract price settlements and will be changed monthly to reflect the changing importance of the different variables.
As the end of the month draws near, Platts will survey the market to ascertain the value of contract settlements for the month ahead. Should verified trade data or firm indications received from the market prove different to the indicators, the qualitative element to the indicators will prevail:
WHERE CAN I ACCESS THE PEI AND PPI?
The numbers are published on PCA and in Olefinscan every Friday.
HAVE YOU CHECKED IT FOR ACCURACY AGAINST ACTUAL SETTLEMENTS?
Platts has back-checked the data for the last five years and found that the difference between contract price on the day it settled and the Platts indicators was on average less than 0.1%. Almost half the time the difference was less than 10 and less than 30 for almost 90% of the time. This is without any qualitative adjustments.