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Parity Pricing

Tuesday, October 6, 2015

6:20 PM

IntroductionRefining of crude oil involves conversion of a single input to multiple finished


products with different market value and chemical properties, thereby
making it difficult to determine the cost of production of each individual
product and hence its pricing.

A commodity will sell for more or less than the


benchmark price depending on how it compares to
the benchmark commodity (percentage of
undesirable components such as sulfur, for
example) and where it is to be delivered, if other
than the benchmark price's point

Import Parity Price (IPP)


1.

nearest domestic port

import

|
a.

Domestic port
include

b. It doesnt include country's internal taxes, internal freight charges


etc.
2. Also referred to as the International Benchmark Price
3. Definition

a. price that importers would pay in case of actual import of product at


the respective Indian ports (to the purchaser's location)
Or
b. it is the monetary value of a unit of product bought from a foreign
country, valued at a geographic location of interest in the importing
country
4. includes the elements of Free on Board (FOB) price + Ocean Freight +
Insurance + Custom Duties + Port Dues, etc.
5. It is 'set' periodically (usually monthly) by the country that consistently
exports the largest quantity or volume of the commodity.
a. It is not mandatory for exporting countries or importing countries to
use the benchmark price as international trade is based on favourable
prices.
b. Other exporting countries may set their own export prices or use the
IPP, whichever is advantageous to them
6. It cannot be applied to locally produced goods of the same type whose
local-production price is lower than the imported goods unless the
quantity that is imported is vastly more than the quantity that is locally
produced

7. It is not applied to locally produced goods in a regional market that is selfsufficient in the goods as this would be unfair to the consumers in the
region and lead to an exorbitant profit for the seller.
In such cases, the selling price is determined by the production cost in
the region and governments may introduce price control to protect
consumers

8. Developed countries such as the US, UK, Canada, Germany, etc., do not
use the IPP to determine local selling prices. For example, in the US, which
imports about 30% of the crude oil it consumes, the price of fuel is
determined by the local production cost of gasoline, diesel or propane,
including refinery cost, with the cost of any imported crude oil taken into
consideration (added) when calculating the selling price. This practice is
followed in almost every developed country
9. It has no economic or trade validity. It is considered a variation of
Purchasing Power Parity, which is an entirely different concept that is
economically accepted. IPP is a recent concept introduced as a result of
globalisation by commercial organisations to enable them to profit from
petrol and natural gas Page 1

IPP and EPP together define a range of the possible


equilibrium prices for equivalent domestically produced
goods
The phrase ...possible equilibrium prices for an equivalent
domestically produced good. in the first definition (above) is
normally qualified by the following considerations:

if the goods in question are not produced but is


naturally occurring, such as water, a mineral or farm
produce, and the population has benefitted from this
bounty or produce at no cost or at local prices before
import/export trade in the goods commenced, the
domestic price of locally produced goods must remain
the same and may not be influenced by the IPP;

if a quantity of imported goods is less than the quantity


available locally, the locally produced goods must
continue to be sold at their historic prices and the cost
of the imported quantity covered by its value being
absorbed (added) to the quantity cost of the goods
being sold in the domestic market;

if the imported quantity is more than the quantity


available locally, the cost of the imported quantity is
covered by its value being absorbed (added) to the
quantity cost of the goods being sold in the domestic
market; and

If there are regional divisions or markets within the


country, the above considerations usually apply only to
the region or market that imports the goods; and the
domestic selling price in the regions or markets that do
not import the goods is not affected by the IPP.

globalisation by commercial organisations to enable them to profit from


imports and/or exports, mainly in developing countries. IPP cannot
therefore be cited as a principle or policy to determine the local selling
price of a locally produced commodity

Export Parity Price (EPP)


1.

|
a.

factory

domestic port

include

2. Definition - price which oil companies would realize on export of


petroleum products.
3. This includes FOB price minus the costs of getting the product from
the farm/factory to the border + Advance License benefit (ALB is
currently zero)

In FOB cost of delivering the oil to the nearest port is included i.e.
= no inland freight charges
4. It applies only to the quantity that is exported and not to the quantity
that is sold domestically
5. Where a country or a region in a country has a surplus of a product that is
exported, the EPP or the export price is determined by considering the IPP
of the commodity and other trade factors

Otherwise that country will have an unfair advantage in the


international market and will distort the market - to check
Therefore, even if the country isn't importing that surplus product, it
will have to give some weightage to it in the formula of IPP thus
bringing the price down - to check

Trade Parity Price (TPP) 1. Weighted average of EPP and IPP

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