OUTLOOK '08: Crude to determine Europe aromatics

27 December 2007 12:15  [Source: ICIS news]

By Peter Salisbury and Julia Meehan

LONDON (ICIS news)--With crude oil prices fluctuating around $90/bbl into the end of 2007, aromatics producers, buyers and traders agreed that the energy complex would play a volatile yet decisive role in the coming year, putting the US literally and figuratively in the driving seat.

Or, as one major aromatics producer put it: "It’s hard to tell what will happen to crude in the next 24 hours, let alone the next 12 months."

With production of benzene and toluene principally derived from pyrolysis gasoline steam cracking in Europe, and the xylenes from catalytic reforming, the aromatics are close enough to crude oil to see a direct domino effect from its variances.

This was best exemplified in the fourth quarter of 2007, when high material spot prices were maintained on the back of near-$100/bbl crude, despite a general lack of demand and good supply of material. And where crude goes, said one source, nobody knows.

What market participants could predict, however, was a quiet opening to the new year, as consumers held off from buying at prices they saw as being inflated by high energy complex values. There was, buyers and traders said, ample supply of toluene.

Most traders were of the view that the US driving season, which begins in May, would be the only thing to pull aromatics markets out of the doldrums if demand from the petrochemicals sector failed to improve during the first quarter of 2008.

The direction of crude oil and demand for gasoline in the US were seen by the industry to be the two major influencing factors for the market in 2008.

"Europe is net long on benzene and toluene but the market is driven by crude and gasoline," a source at a major toluene producer commented. The producer did not foresee any changes in the balance of the market in 2008.

The producer questioned the ability of US to absorb rising gasoline costs but felt that, regardless of the economic situation during 2008, Americans would continue to fill their cars up.

"The Americans will not give up their cars; it's part of their culture," a source at one major aromatics producer agreed.

"The US will play a role, and it’s an election year, let’s not forget this," said the source, who did not expect a major downturn in the US economy as he felt the government would "not shake things up during election time".

After years in thrall to Asian price movements, European contract paraxylene (PX) market dynamics, meanwhile, could go their own way in 2008, according to industry sources.

Where monthly PX settlements in Europe have historically followed movements of the Asian contract price (ACP), November and December saw divergence in the Western region.

This, European buyers and sellers said, was due to a difference in market drivers in the two regions alongside a switch in roles.

2007 saw Europe move into net PX oversupply, despite a negative imbalance globally. This would continue for at least the first half of 2008, with export to Asia supporting the market.

The central difference between the two markets, sources said, was that while European pricing was driven by feedstock and energy complex issues, in Asia the downstream purified terepthalic acid (PTA) market was the central force in pricing.

In Europe, buyers and sellers said, downstream markets were better supported and protected, whereas in Asia PTA margins in particular were continuously being hit and producers were having to plan for shutdowns on poor economics.

PX, tight globally throughout 2007, was expected to reach saturation point on production by 2009 or 2010 as new capacities emerged in the East.

Upstream, spot market liquidity was likely to remain at a minimum for mixed xylenes in 2008 according to key market players, with annual contracts continuing to make up the bulk of business.

Orthoxylene (OX) buyers and sellers, meanwhile, widely saw the OX market as likely to follow a regular parabolic movement in 2008, with second-quarter demand for phthalic anhydride (PA) pushing values up in the first half of the year, before demand dropped off and capacity increased in the third and fourth quarters.

Again, however, energy complex values would be firmly in the driving seat on the spot market, with the future as yet unwritten.

By: Julia Meehan
+44 20 8652 3214

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