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Unlike the industry-set CP prices, which are agreed just days before the start of deliveries, the PEI and PPI will be independently assessed and published daily.
Unlike Platts spot price assessments, which reflect value for 1kt of ethylene or propylene in Northwest Europe and are net prices, the PEI and PPI are gross prices.
The indicators lend themselves to a number of uses, ranging from simple negotiating tools for parties that take part in the negotiating process to settle industry contract prices to instruments that can be used by parties in the whole petrochemical chain to hedge volumes several months or years ahead. Examples are given below.
As a negotiating tool
Each month some of the largest buyers and sellers in the world negotiate the official monthly CP for olefins. To gauge value, negotiating parties look at production costs, by-product costs, their own inventories of polymer derivatives and the demand-supply imbalance in the marketplace. These negotiations can be protracted and complex. Platts indicators provide an indication of where the value of the given olefin should be based on previous settlements.
Inventory management
As the PEI and PPI have a high degree of accuracy and are published a month in advance of settlements, they can be used by firms to manage inventories of polymers in a more profitable way.
As an alternative to the contract price
The current contract price is set by four large-cap energy and chemical companies who are required to act independently and in their own interests to determine a price for ethylene and propylene. This has been an effective way to determine price so far, but it has shortcomings. Namely there are many parties that do not take part in the process, but which are exposed to its price. For parties that do not wish to have their costs or revenues determined by their suppliers or their competitors, the monthly average of the PEI or PPI could provide an appealing alternative.
As a hedging instrument
Petrochemicals are one of the last major industries not to have a liquid financial derivatives structure. Financial institutions and exchanges are currently receiving increased interest from clients to hedge their trading activity for a number of reasons.
Whether it is FMCG companies seeking to hedge their costs or olefin and polymer producers to lock-in revenues, the PEI and PPI provides a better alternative to manage risk compared to naphtha prices, the current CP price or polymer assessments.
This is because naphtha's correlation with ethylene can be erratic. In 2014, this correlation has weakened over the past 18 months due to a series of outages that has seen the olefin-naphtha spread widen with significant repercussions for risk management.
Meanwhile, the current CP price is set by just four of 13 large companies that are often competitors to, or suppliers of, many market participants. As such this can create a perception of a conflict of interest.
Finally, with regards to polymer assessments, the PEI/PPI is a better alternative as it is has a more robust methodology that is based on a broad base of liquidity spread over 10 trading days.
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.
Those are:
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.