Greater volatility expected in European chemical markets due to increased dependence on spot volumes

An increased dependence on spot volumes by buyers in 2024 and reduced contract commitments compared with previous years will lead to greater spot price volatility in European chemical and resins markets, petrochemical market sources said.

This impact has come from a trend amongst buyers that have demanded a move away from pricier European contracts seen in 2022 and 2023, and more towards cheaper spot volumes, typically imported from feedstock cost-advantaged producers in the US or the Middle East.

But in what was considered a perfect storm of import delays in January, the Red Sea freight chaos, production issues and industrial action have all conspired to raise the traded spot price for diethylene glycol by around 40%.

Platts, part of S&P Global Commodity Insights, assessed the price of monoethylene barge up around 8% on the week on Feb. 3, while tri-ethylene glycol prices rose almost 17% and DEG trucks were assessed 26% higher. This pattern is expected to continue and become more normal, sources said.

Greater flexibility in 2024 contracts

"When you increase the flexibility (for buyers) then the suppliers can reduce minimum (contractual) volumes, then the supplier can reserve the right to supply minimum volumes," an ethylene oxide producer said Feb 3.

Another glycols producer concurred, arguing that their job was to add value to MEG over the ethylene its company produces but admitted that the glycols trade had changed in 2024 as a result of the pricing dislocations seen last year.

"We have a lower (2024) contract coverage. It is not 100% anymore. Buyers, they want to profit from cheaper spot (import) prices. [However] when it gets tight, you serve your contract customers, then look if you have any material available (you can supply). If you secure less volume on contract and you rely more on spot, with more delays, then this (volatility) is what we see," a second ethylene oxide producer said.

"I think customers are looking for more flexibility and are more reluctant to make high contracts and keep more volume open for monthly spot negotiations," a PVC producer said Feb 8.

European ethylene derivative buyers take cheaper spot imports

Since the start of the year, European buyers of ethylene derivatives and resins have taken advantage of persistently weak demand to lock-in greater flexibility and a reference to spot prices in their 2024 term contracts. This is the result of a wider discount in the spot price of some derivatives versus their contract prices seen through 2023.

European linear low density polyethylene spot prices averaged at a massive 38% discount to domestic monthly contracts in 2023, whilst MEG spot trucks and barge spot prices averaged 30% and 34% respectively in 2023. Polyvinyl chloride spot prices averaged at a 14% discount over monthly contracts in 2023, according to Platts data.

The stark contrast was observed in the polyethylene and ethylene glycol segments since 2022, following Russia's invasion of Ukraine. Spot price discount averages have doubled from 13.71% in 2021 to 25.81% in 2022, whilst MEG barge and truck spot price discounts soared to 28.8% and 25.1% respectively in 2022, also from 11% and 2.8% respectively in 2021, Platts data showed.

These steep discounts were deemed an unsustainable cost disadvantage that buyers further down the supply chain had to bear when faced with weak persistent demand, rising costs, and the need to compete with Asia or the US.

Buyers in the end got their way and succeeded in reducing their dependence on pricier contract supply in 2024.

Levels seen as high as 90% of all supplied volumes in European polyvinyl chloride market dropped to 75%, whilst in MEG they went from 75% to around 50% by 2024, leaving buyers to seek more of their needs from spot markets, via cheaper imports.

The redesign of contract terms included more supply flexibility as well as a reference to spot prices in contract price formulas. At the time, it was hoped that this flexibility would address the spot/contract price imbalance seen in 2023.

Europe's ageing infrastructure exposed

What prompted these changes? Buyers of these ethylene derivatives in 2023 were hit by a combination of weak demand and rising interest rates, whilst producers were hit by inflation and volatile oil prices, pushing the cost of naphtha higher, which made Europe less competitive versus the gas feedstock advantaged US and Middle Eastern producers.

Europe is dependent on costly naphtha-based feedstocks processed in ageing and inefficient petrochemical plants, whilst the newer, more efficient gas-based US/Middle Eastern producers were able to exploit a feedstock shale gas/ethane cost advantage of roughly 50% in favor of ethane producers. More capacity was added in 2023, and more is expected to come onstream in the next few years in the US and Asia.