Dawn of an era

24 February 1997 00:00  [Source: ACN]

The third quarter of 1996 quietly ushered in the Asian contract price - fundamentally changing the way business is done in paraxylene markets. Michael Wilczek finds out how and why

A FUNDAMENTAL change in the paraxylene (PX) market happened at the end of the third quarter of 1996. Without any fanfare, Asia got its own contract price.

The reason the Q3 settlement was so special was the way it was represented to the world. China American Petrochemical Co (Capco) - the largest PX buyer in Asia - announced it had settled contracts at US$425/tonne cfr Taiwan. This was also the price commonly quoted by other buyers and producers. Even when reported at 19.3 cent/lb, the price was still just a conversion of the dollar/tonne price.

More importantly, for the first time the Asian contract price was not represented as the US contract price (USCP) plus an alpha. The settlement was still influenced by the USCP, but it had been negotiated using Asian terms - as dollar/tonne, not cent/lb.

This is not just a semantic difference. Market players say it is evidence that the Asian supply and demand balance is becoming an increasingly potent factor in Asian pricing. And market players see purely Asian contract prices as an inevitable trend as the region becomes more and more self-sufficient.

'There is no reason the Asian PX contract has to be based on the USCP,' a US producer says, 'especially when you look at the capacity coming onstream in Asia over the next couple of years.'

Contract prices for purified terephthalic acid (PTA) are already negotiated independent of the US price. The Taiwanese contract price is the benchmark for Asia. This is not only because of the buying power of Taiwanese consumers, but also because of the major PTA capacity there.

However, despite the maturing PX market in Asia and its growing capacity, there is some resistance to cutting ties with the USCP. As PX goes into oversupply, producers have more to lose with a contract price linked to Asian markets.

'Buyers benefit most from Asian-based contracts in an oversupplied market,' an industry source says. 'The contracts tend to reflect spot markets and react more to changes in downstream markets. For the same reason, producers would prefer to base prices on the USCP, which is traditionally more stable than Asian prices.'

Spot material in Asia is tight now, but market players agree the situation is only temporary. For the most part, they expect a buyers' market for PX until 2000.

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Negotiations for Q1 contracts are well underway in Asia and it is clear the influence of the USCP is waning. Although the Asian PX contract is still being represented in cent/lb, it is no longer being negotiated as an alpha.

Asian buyers have been waiting for the USCP before making deals, but talks in Asia have continued independently.

Producers have been offering Asian buyers the same price as the USCP, which is 20.5 cent/lb. Asian buyers have been resisting. Most are only willing to accept a 1 cent/lb increase from the Q4 settlement of 19 cent/lb to cover higher feedstock costs.

Producers say a settlement is likely soon, but Asian market conditions are threatening to throw a monkey wrench in the works.

Spot prices in Asia have been weakening ahead of the startup of Yukong's PX plant in Ulsan at the end of the month. PX surpluses which were offered by Chinese Petroleum Corp (CPC) early this month have also put downward pressure on spot prices.

CPC withdrew its tender because of low prices and may have to cut production if it cannot find an outlet for surpluses. Factors such as these have led the Asian market away from the USCP.

THE collapse of PX markets last year was a major factor accelerating the shift to Asian pricing. Asia was hit much harder than the US by weak demand for polyester.

PTA producers in Asia were demanding relief and local producers had little choice but to give in. Contract prices started dropping and by Q2 1996 prices were at the USCP flat. Producers tried to keep parity with the USCP in Q3, but failed. The Q3 settlement of US$425/tonne - or 19.3 cent/lb - was 2.7 cent/lb below the USCP.

This was the first time the Asian contract price had dropped below the USCP in more than four years. It came as a shock to US buyers who immediately wanted Q3 prices renegotiated in line with Asian settlements. The USCP for Q3 stuck, but US buyers were able to get a substantial decrease for Q4.

1997 Asian PX startups ('000 tonne/year)
Mitsubishi Oil (Oita Paraxylene)	Japan	300	Apr
Samsung General Chemicals	South Korea	350	Dec
Singapore Aromatics	Singapore	350	Jan
Ssangyong Oil	South Korea	600	Q4
Aromatics (Thailand) Co	Thailand	350	Jan
Yukong	South Korea	300	Feb
Total		2250

Both the Asian contract price and the USCP settled at 19 cent/lb.

Not only is the growing Asian market allowing the region to cut ties with US pricing, it now plays an important role in for the USCP.

Again, during this quarter, US buyers demanded pricing equivalent to Asian buyers. Some US buyers were waiting until Asian contracts were concluded before settling. They did settle before Asia, but the situation demonstrated Asia's increasing influence on the USCP.

The cut in the USCP for Q4 brought it in line with Asian prices - exactly what US buyers were asking for.

In Asia, PX cutbacks and a pickup in demand for PTA kept Asia's prices from falling further. The higher PTA operating rates sent Asian buyers scrambling for PX in a very tight market. And rising spot prices helped bring a quick settlement.

In the long term, capacity additions for PX in Asia will decrease dependence on imports from the US and the USCP will have less of a connection to prices in Asia.

Asian PX capacity will increase by more than 2m tonne/year in 1997. In Q1 alone, Asian capacity will jump by 1m tonne/year.

Aromatics (Thailand) Co in Thailand and Singapore Aromatics in Singapore both started 350 000 tonne/year reformer-based units in January. Yukong will start its 300 000 tonne/year plant at the end of February.

These startups are already being felt. Capco is a part-owner of Singapore Aromatics, and PX from the joint venture has displaced supplies from CPC, causing some uncertainty in the market.

Industry sources estimate CPC's PX surplus has increased to 40 000 tonne/year with the startup of Singapore Aromatics.

Capco is CPC's only contract buyer. Most of CPC's 400 000 tonne/year PX capacity had been dedicated to supplying Capco by pipeline. However, from 1997 onwards, Capco will offtake only 360 000 tonne/year of PX from CPC, sources said.

In Japan, there will be one new PX plant along with continued small-scale capacity additions and debottlenecking. Mitsubishi Oil will start its 300 000 tonne/year joint-venture plant in April. The plant in Oita is based on toluene disproportionation.

The bulk of the 1997 additions will be in South Korea. Ssangyong Oil's 600 000 tonne/year PX plant will be onstream by Q4 1997. Samsung General Chemicals' 350 000 tonne/year is expected to start in December. By the end of this year, South Korean PX capacity will outstrip Japan, presently the region's largest PX exporter.

Capacity additions in 1998 and beyond are being called into question. Producers are starting to delay or cancel projects (ACN 24 February p26).

Even with demand growing at 9% annually for PX in Asia, it will be hard to absorb that much capacity. Demand is only expected to catch up by 2000 when industry watchers forecast Asian demand to reach about 4m tonne/year.

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