Energy Costs

Energy use and costs have been at the front of my mind for the past few weeks, as I guess they have large parts of the chemicals industry, and the European Commission, which I think deserves a small round of applause.

There have been major problems for energy intensive users in the UK over the winter with inefficient gas futures market and spot markets leading to considerable spikes in the price of Natural Gas, for example.

The UK market for natural gas is pretty well free, unlike those on the nearby continent of Europe to which it is connected by a pipeline. (Incidentally this the capacity of this is greater from the UK to the continent than it is from the continent to the UK). State control in continental gas markets means that gas suppliers there can afford to treat the UK as a gas reservoir. This combination of an illiquid futures market in natural gas in the UK and state controlled gas companies in most of the rest of Europe is not satisfactory.

Yesterday the commission said it was sending a 'reasoned opinion' -- short hand for a final warning -- to Germany, Belgium, Estonia, Ireland, Latvia, Lithuania, Sweden, Greece, Spain and Luxembourg for failing to make either of the directives of on internal gas supply or electricity markets into their national law. This follows an initial yellow card in October and could see the countries making their excuses before the European court.

There can be no reason not to transpose the directive into law and then enforce it.

Chickens and eggs

There is a philosophical concept: the category error. This sort of thing happens when people try to understand something new but don’t quite get it. It may also apply to some of the unanswerable questions: What is the meaning of life? What does yellow taste of?

I think that you might realise that you were labouring under one just after the ‘Oh, I see’ moment when the penny drops.

When it comes to the London Metals Exchange’s plan for a futures market in polyethylene and polypropylene, I wonder if both sides aren’t suffering from something like this.

Large parts of the polyolefins-producing industry believe that their products are not commodities and therefore that they won’t take part in it. To be fair, polyolefin producers spend a lot of time and effort convincing their higher-added-value customers that their products are unique and offer distinct benefits. They are worried about the price of poor polymer driving out the margin for good polymer

The LME believes that just like pork bellies, orange juice, copper and aluminium, polyolefins are commodities and that a price for three polypropylene and one polyethylene grade will set a base price for the industry. Companies can then negotiate premiums on this for the benefit their products bring to consumers and for delivery processes.

Neither are completely right. But does the polymer industry really need another price discovery mechanism?