The disconnect between spot and monthly or quarterly contract prices seen across a number of petrochemical markets raises a key question: will petrochemical contracts price differently in the future? It’s a topic regularly discussed by market participants.
Petrochemicals would not be the first commodity to consider a price mechanism change. A number of markets including LNG and iron ore have switched from fixed pricing in long-term contracts to a market-based mechanism linked to spot.
Iron ore moved from fixed-price yearly long-term contracts in 2010 to index-linked contracts. These changes occurred as the spread between spot and contract diverged, resulting in buyers and sellers no longer being able to agree a contract price. The move to contracts based on spot indexation resulted in more flexible terms and conditions while retaining the security of supply provided by long-term contracts.
Spot prices reflect the value of the marginal ton. In increasingly interconnected global markets the spot market is becoming ever more important in reflecting the tradable level of a commodity.
—Annalisa Jeffries
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