European PET producers rethink traditional contract formula

A year of supply chain delays and high freight rates, coupled with rising utility prices, are prompting European virgin PET producers to rethink their contract strategies for 2022, market sources said
.

On October 28, a producer said it was moving away from the "cost-plus" formula and did not plan to renew contracts for next year under it
.
European PET contracts are typically tied to feedstock paraxylene (PX) or purified terephthalic acid (PTA) and monoethylene glycol (MEG) and contain a fixed premium portion that is renegotiated annually
.

Rising prices for raw materials, freight and utilities (gas and electricity), as well as changes in the supply-demand mix, are squeezing production margins, making it difficult for PET producers to cover the cost, the sources said
.

According to market sources, some brand owners and tray and sheet producers have been looking to secure volumes of virgin PET to replace recycled PET material amid concerns that the supply of recycled material will not be enough to meet their needs
.
Therefore, there will be greater interest in this material that is lacking in Europe
.

On October 19, a producer said buyers would jump from one product to another based on economics and demand
.

The producer added that they do not believe the cost-plus formula will be the best solution for next year as it does not represent a "win-win situation" for all parties involved
.

However, the producer said that if some contracts were still on a cost-plus basis, the "mark-up portion" would be renegotiated quarterly rather than annually, while maintaining annual consumption commitments
.

"Producers do not accept the 'cost-plus' formula, everything will be based on spot indices," a trader said on Oct.
28,
adding that any remaining cost-plus contracts would be renegotiated on a quarterly basis
.

"The market will be forced to spot
.
If the spot is tight, everything will be tight,
" the trader added
.

Another PET producer said on Oct.
27 that there will be few contract pricing formulas related to raw materials in 2022
.

Consumers say that while PET consumers are currently partially shielded from soaring production costs, they are also being hit by rising utility bills
.

On October 20, a consumer said recent changes in electricity prices were "concerning" because they were not reflected in the pre-negotiated "additional" part of the contract formula
.

So, according to consumers, there is an incentive for producers to capture electricity in the "accessory" component, which means revising the formula higher in 2022, or factoring electricity into the feedstock cost component
.

"There is a lot of pressure to change the contract structure next year,
" the consumer added
.