Secret rebates send EU plastics benchmark above its true cost
An unregulated benchmark used to set the price of plastics in Europe has veered above the true cost in recent years, because of secret rebates chemical companies give each other that disguise the price of the main precursor, four sources familiar with the industry say.
Ethylene, a flammable gas, is the main feedstock used to synthesize the most commonly used plastics, found in the vast majority of all manufactured goods. It is produced in refineries from natural gas or crude oil, as one of the main products of the $400 billion global petrochemicals industry. When manufacturers buy and sell plastic, a benchmark of the ethylene price is often written into their purchase contracts, to reflect the raw material cost.
The sources include one person at a petrochemical company and three people who research the industry. The actual price companies charge each other for the chemical is secret, and companies tend to offer big clients discounts from the benchmark to reflect economies of scale, local market conditions, or other factors. But those discounts have grown, making the benchmark a less accurate reflection of the real costs.
Companies do not have to pass the rebates on to their customers further down the supply chain, who are contractually obliged to pay prices based on the higher benchmark. Reuters was unable to assess the degree to which the practice has hurt manufacturers of goods made from plastics. More than 10 companies that buy or sell ethylene, contacted by Reuters, declined to discuss their pricing, including any rebates they offer or receive.
“There’s an understanding that this is not a perfect process,” said Matthew Thoelke, senior director of olefins and derivatives at analysis firm IHS. The sources said the petrochemical companies that participate in setting the ethylene contract price while giving or receiving rebates include Europe’s biggest, such as BASF, Royal Dutch Shell, Total and LyondellBasell. BASF, Shell and Total declined to comment on their pricing. LyondellBasell did not respond to Reuters request for comment. —Reuters