Price Participation clauses allow one party (usually the buyer, e.g. smelter), the ability to underlying market price during the QP.
This “step up” in discount with market price is called an “escalator”, and it may also reverse low prices.
These clauses can apply directly as a discount to the price, e.g. as in a copper concentrates by a miner to a tolling smelter for processing concentrates.
Copper Concentrates Example:
In this example, the buyer of copper concentrates receives a discount to the LME price which increases as the LME price increases.
Table 2 PRICE >=
$0
$4000 $5000
$6000 $7000 $8000 $9000
Chart 1
6% 5% 4% 3% 2% 1% 0%
$0 $4000 Source: ADM Investor Services International Limited $5000 $6000 Discount range Zinc Concentrates Treatment Charge Example:
In this example, the miner pays a Treatment Charge of $300/Mt of concentrate to the tolling smelter, subject to an escalator of +10%/-10% either side of LME prices at $2500/ Mt:
Chart 2
$400 $380 $360 $340 $320 $300 $280 $260 $240 $220 $200
$7000 $8000 $9000
PRICE < $4000 $5000
$6000 $7000 $8000 $9000 no limit
Source: ADM Investor Services International Limited
PP DISCOUNT DISCOUNT RANGE
$0 $40
$100 $180 $280 $400 $540
$0 $50
$120 $210 $450
no limit
1800
2000
2200 Source: ADM Investor Services International Limited
PP clauses give traders, processors and smelters (i.e. parties without an underlying price exposure) a small degree of price participation, in return for the seller getting improved terms.
18 | ADMISI - The Ghost In The Machine | January/February 2019
2400
2600 LME Zn Price - US$/Mt
2800
3000
3200
Treatment Charge - US$/Mt
PP Discount
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