Recently, a new trading platform has evolved, specifically for the plastics and polymer industry. After a great deal of success with the venture, the initiators, INSCX Exchange, have broadened the system to include base oils transacted within the EMEA regions. This first toe in the water is designed to be broadened into a global platform should the base oil industry find the system an attractive alternative or an addition to normal practice.

The platform provides an electronic, real-time pricing and trading mechanism that can be used by any approved sellers and buyers for a number of purposes. The primary use of the system is to post offers for materials that sellers are looking to move. At the same time, buyers looking to procure base oils can list bids on quantities of specified material, seeking sellers who may be able meet their requirements.

Prices can, therefore, be pitched in the exchange within specified geographical areas where potential trades can be effected between buyers and sellers. These prices carry anonymity when posted and can be varied or changed within seconds by instructions fed to the trade desk of the Exchange manning the electronic system. Hence, validity and short-term alterations in prices can be made immediately, allowing full control by both sellers and buyers in any situation. Specifications for the products listed can be provided along with details of quantity, dates and location.

The two parties do not identify themselves until a trade is hatched. Some players have voiced reservations regarding the lack of initial contact between seller and buyer. However, this is not the case because each trade is effected on subjects and is completed under the seller’s (or buyer’s) terms and conditions.

The exchange mechanism works easily and simply without complication, almost like fixing a vessel where the exchange takes the place of the broker. Offers and bids are coordinated through the electronic floor, providing an auction scenario with buy- and sell-side anonymity, followed by the trade or deal being confirmed on a principal-to-principal basis on or after agreement on price.

A major advantage of such a system is real-time pricing, which can be established on the basis of one transaction or multiple dealings. Real-time pricing has the advantage of fixing index-linked contract prices to actual trades, removing the subjective input of prices that are reported through various publications and that invariably may be ahead of or behind the market. From a statistical standpoint, information provided by the exchange system is accurate and auditable, providing a valuable tool for analysts who provide forecast data that can be used for investment programs.

Another advantage of the exchange is that it provides liquidity into an industry that has relied on either reputation or name (in the case of majors) or the banking system, which has necessarily played a large part in base oil trading. Traditionally, guarantees of payment required by sellers have involved third-party banks that use banking instruments such as letters of credit or alternative bank guarantees to confirm payment to the recipient’s bank. These instruments have proved cumbersome and expensive, and when they have to be amended, the only beneficiary is the bank. While the use of banks has been necessary to ensure payment against documents, alternative systems using the exchange can be put into place that both simplify matters and cost a great deal less to effect.

Even local distributors selling in truckloads to small blenders have to embark on credit checks and chasing payments when they offer open credit to customers. In contrast, the exchange mechanism, while not being a panacea for open borrowing, can offer alternative arrangements for payments for approved sellers and buyers.

An example of this flexibility is when a base oil parcel is sold between two exchange approved parties. Here, the seller can be paid immediately against contract, while the buyer may opt for acceptable extended payment terms through the exchange that can be tailored to meet cash flow needs. The costs for these transactions are leveled well below traditional bank costs for a similar package.

Another example is when a buyer/trader wishes to forward purchase a large quantity of available base oils, perhaps when the market is at a low point, and then looks to draw down from the quantity on a monthly basis or over a certain period. The financing for purchase and storage of such cargo can be organized and put into place simply and quickly, avoiding delays through banking channels with the required submission of detailed business and borrowing plans.

This innovative system currently just imitates other exchange platforms such as the InterContinental Exchange and the London Metal Exchange, using the same technology and rules. Although, this approach may be new to many in the base oil industry, such an exchange platform should perhaps be greeted a new, lower cost way to transact business.

The use of an exchange may be a quantum step forward for the base oil industry. Interested parties can inspect the platform by registering at: www.comdaq.net/Registration.asp