ACP validity extension sought to push settlements

OREANDA-NEWS.  Proposals for a validity extension to the monthly paraxylene (PX) Asia Contract Price (ACP) negotiations have been suggested as a solution for the assessment that has only been settled four times in the last 22 rounds.

Economics for the downstream fiber intermediates market are so bad and there is no room for any mistakes amid today's extreme volatility, said a buyer directly involved in the negotiations.

Extending the negotiation period will allow buyers and sellers to observe trends in the spot market longer and could achieve settlements, said another ACP-linked buyer.

ACP-linked sellers currently offer their respective contract prices until the last working day of the preceding month, with the exception of ExxonMobil whose offer does not state a validity.

Buyers are now requesting for validity extensions ranging from a few days to as long as two weeks, hoping the proposal will take effect for January 2016 negotiations.

But least two ACP-linked sellers said that they are not supportive of any extensions to the validity of their offers, adding that the proposal will not help to achieve settlements.

The main problem is that the purified terephthalic acid (PTA) market is in oversupply, so the current system will work if the downstream sector was firmer, said one of the two sellers.

"We should consider fundamental supply and demand forecasts to determine the ACP. An extension will not help," said the other seller critical of the new solution.

Margins for the downstream PTA sector turned negative in the third quarter of 2012, coinciding with the period of time when negotiations for the benchmark assessment started to fall apart. There were two occasions in 2012 when talks broke down. The number of occasions when discussions fell apart gradually increased to five in 2013 and hit a record 10 times last year. Negotiations have failed eight out of 10 rounds this year.

Other ACP-linked sellers did not immediately dismiss the proposal but said there must be a general consensus to avoid confusion in the market.

It did not want to end up with a situation where different buyers and sellers settle their ACP on different days, as the broader market may get confused, said one seller directly involved in the negotiations.

The PX ACP is an important 50pc component in most long-term contracts in Asia-Pacific, with spot prices making up the rest of the formula. Five ACP-linked sellers — JX Nippon Oil & Energy, Idemitsu Kosan, ExxonMobil, SK Global Chemical and S-Oil — make monthly offers to six buyers that includes Zhejiang Yisheng Petrochemicals, Mitsubishi Chemicals, Mitsui Chemicals, Oriental Petrochemical Taiwan, BP and Capco.

These 11 companies negotiate contract prices to the last working day of the preceding month that the broader market relies on as a benchmark. Contracts settlements default to settle against spot prices in the event ACP negotiations break down.

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