FEATURE: European chemical, resins producers expect reduced 2024 term contracts

European ethylene derivative producers are expected to see a significant reduction in 2024 contractual commitments, due to the wide disparity between spot and contract pricing in 2023 and expectations that demand will remain weak into the new year.

The wide gap between industry-settled contract pricing and spot market levels, combined with the volatility in upstream markets and higher feedstock costs, have forced buyers to review their 2024 term contractual commitments to protect a fragile bottom line, market sources said.

In addition, with European production subject to expensive oil-based feedstock costs, regional consumers of polyvinyl chloride, and other ethylene derivative intermediates, have said they expect greater imports from the newer and more efficient shale/gas-based ethylene derivative producers in the US and the Middle East, whilst new capacities in Asia are set to add to global production next year.

One ethylene glycol trader said they expect to see some contract minimum commitments as low as 50% in 2024, with the other 50% exposure being supplied from the spot market. This compares with around a quarter of all contract commitments as of this year.

"They saw that there was 30% difference between contract and truck FCA spot prices. Even smaller customers that buy 4-6 trucks...said that even those would be split, half under contract and the rest in the spot market," one mono-ethylene glycol distributor said recently.

"Last year if I was taking an average 70-75% under CP and the remaining 25% in the spot, now it will be 50:50 contract versus spot. Not only the larger customers are getting their way but also the smaller customers. It's all about the volume," the source added. "There is no regaining of economic environment until Q3 or Q4 2024. It's pessimistic; we will see where this will go. There will be plenty of product available next year from US and Middle East."

"There is plenty of product in the market. Large portions won't be bound to contracts. Usually, the large portions are bound to contract but what I expect is that a lot of potential customers are pushing back and they won't take as much volume under contract as there will plenty of spot material," the source added.

Higher US deliveries

Mono-ethylene glycols contract volumes are also expected to be reduced next year as buyers turn to greater spot volumes, sources said. In addition, some US suppliers are intent on supplying more volumes in 2024, according to one MEG trader.

"I believe that some US deals [based on the European contract price mechanism] will be done, and they are pushing it quite hard. Nothing is yet confirmed. Most people are holding out. Contracts [from the US] will be coming in higher next year and will be having to reflect that in our own. We can't offer the discounts that buyers were getting this year, and they seem to be able to accept that," another MEG trader said last week.

However, the same trader said that, if European buyers want more spot volumes, they may well have to end up paying higher to reflect the higher spot demand.

"If the US material [based on ECP] is coming into the market then spot pricing will be coming in higher," the source said.

This pattern of shifts in demand for 2024 is being repeated across other ethylene derivative and resins segments, particularly in the chlorine and polyvinyl chloride business segments, where some European chlorine producers have already announced temporary closures in order to arrest negative margins.

"We had to politely look at volumes [with our ethylene suppliers] for next year," a chlorine and PVC producer said in early November. "Volumes that were already low compared to normal years. They are far below what we would do in normal years. When we started our ethylene contracts, we were conservatively cautious and in 2024 we do not see a recovery for the PVC business. Today I got our view that we see the first seven or eight months as difficulties for PVC sales and a recovery from September [2024] onwards."

Instead of a decrease in ethylene contract commitments as some suggested, the PVC producer said it had agreed a higher contract price rebate, which would mitigate the wide differentials seen between spot and contract this year.

"Compared to this year we will have a substantial difference between spot and contract rebates and volume flexibility. There will be more flexibility in the volumes and the rebates," the producer source added.

Rationalization

With inflation and interest rates still high, demand has remained weak for most of the year. Added to this, when oil prices firmed earlier in the year, chemicals producers down the ethylene supply chain endured negative production costs, with the result that some stopped production or even considered rationalization.

The issue, according to some market participants, is whether oil-based, costly European production is needed.

"Naphtha [in Europe] is an outlet to run refineries. This is a high cost position in Europe and that will mean that current operation rates of plants 60-65%, and no one can survive with these rates, and something has to give," a PVC producer source said late last week.

Already some European petrochemical plant shutdowns have been announced in October.

"Long-term no one can survive with these low operating rate plants. Closing these plants to import VCM and EDC is a temporary solution but long-term no one can survive. Some plants will be under discussion for closure, and I don't think that there is any other choice," the PVC producer said.