INSIGHT Asia’s aromatics players can’t avoid the squeeze on demand

30 January 2009 16:25  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--It is hard to see how aromatics producers are going to escape the twin squeeze of lower Chinese and US benzene demand, which could occur as toluene and mixed xylenes (MX) returns decline.

MX has in particular been the big saviour over the pas two months as a result of a recovery in the polyester chain.

The questions being posed now, though, are whether MX and paraxylene (PX) prices were pushed up too quickly – and whether the increases have been more to do with production cuts than better demand.

 Refinery majors such as SK Corp and LG-Caltex would to some extent be cushioned from falling overall aromatics returns by gasoline and other fuel markets.

But for the smaller refinery-based producers, the risks over the next few quarters are great.

The same goes for the cracker-based BTX producers. Bigger and more integrated players would be in a much better position than smaller competitors.

The South Koreans benefited greatly from lower benzene output in China in 2008, said Bert De Guzman, consultant with DeWitt & Co.

"China increased its imports because of cutbacks in reformer, pygas and steel-based benzene production on poor economics.

"Imports rose to 322,000 tonnes from 220,000 tonnes in 2007. The South Koreans supplied 257,000 tonnes of last year’s total compared with 164,000 tonnes in 2007.”

But 528,000 tonne/year of coke-oven light oil (COLO)-based benzene capacity is set to come on stream in January alone, said De Guzman. COLO is a by-product of steel production.

"Even assuming a conservative operating rate of 80% at these new plants, this would mean an extra 420,000 tonnes of output – wiping out the need for any imports based on the 2008 level."

In 2007, 195,000 tonne/year of COLO-bases capacity was due to start-up in China followed by 972,000 tonne/year in 2008. This year's total could be as high as 962,000 tonne/year.

Start-ups were delayed in 2008 because of low benzene prices, lack of COLO availability and logistics difficulties that hampered COLO collection.

Benzene prices have recently increased and there is more COLO available.

South Korea is Asia's biggest exporter of benzene. Its shipments totalled 1.2m tonne in 2008, a slight increase from 1.18m tonne in 2007, said De Guzman.

Thailand is also very vulnerable to any changes in global trade as its benzene surplus is 500,000 tonne/year. PT Aromatics brought a new reformer on stream in 2008.

The US is another vital export market for Asian benzene - and also for toluene and MX.

The South Koreans shipped 530,000 tonnes of benzene to the States in 2008 against 468,000 tonnes in 2007, De Guzman added.

A lot of this benzene was re-exported as styrene monomer (SM).

Middle East start-ups are likely to force US SM exports out of the market – leading to a sharp drop in demand for Asian benzene.

Asia-US toluene and MX shipments traditionally increase in April onwards ahead of the US summer driving season. This has helped support prices in this region for many years.

But with the world's biggest economy in deep recession, gasoline demand is expected to stay weak.

China is also not only adding COLO-based benzene capacity.

Reformer and pygas-based new capacity totalled 941,000 tonne/year in 2008 with 2.328m tonne/year planned for 2009 and 2.26m tonne/year for 2010, said De Guzman.

“Benzene consumption in 2008 was 4.184m tonnes, 424,000 tonnes of which was supplied to phenol producers and 1.65m tonnes to the styrene monomer (SM) sector.

“On paper, demand was 6.941m tonne based on all the plants running at 100%.”

This will rise to 8.191m tonnes by 2010 assuming projects go ahead and new plants run at maximum rates, he added.

Forty-five percent of global phenol production is converted into bisphenol-A (BPA) and then polycarbonate (PC), according to ICIS chemical intelligence.

PC has been hit both by the economic slowdown and weaker CD sales resulting from the boom in downloadable music in general.

The other big downstream market is phenolic resins, accounting for 28% of global demand.

These are used in construction applications and so have been badly hit by the collapse in housing markets.

Phenol is also the basic raw material for engineering resins used in automobiles – another big victim of the crisis.

Prices for phenol were, perhaps not surprisingly therefore, only at $470-520/tonne CFR main port China on 23 January – a 70% reduction from June 2008, according to ICIS pricing.

Buyers were holding out for lower offers after the Lunar New Year will weaken further.

SM, though, was $650-660/tonne FOB Korea on 23 January, a $45/tonne increase on the week before.

The price rally – which began in December – is down to inventory rebuilding rather than a strong recovery in final end-use demand, said producers and buyers.

Inventories are again on the rise: the amount in storage tanks in eastern China is, at 65,000 tonnes, 15,000 tonnes higher than a few weeks ago.

Weak derivatives markets have hit benzene pricing very hard, resulting in values being close to or even below the cost of naphtha since October.

The week ending 23 January was no exception. Naphtha was at $414.50-14.50/tonne CFR Japan, a gain of $13/tonne, with benzene only $10/tonne higher at $360-285/tonne FOB Korea.

"Reformers are still just about breaking even because positive toluene and MX spreads are offsetting losses on benzene," said De Guzman.

He estimated the minimum spread between naphtha and BTX is roughly $170-180/tonne.

Toluene was at $515-525/tonne FOB Korea on 23 January compared with $435-450/tonne FOB Korea four weeks earlier.

But uncertainty over post-lunar new year demand plagues the toluene and every other chemicals market.

The strongest recovery has been in the polyester chain.

Isomer grade xylenes were at $640-650/tonne FOB Korea on 23 January, up from $435-450/tonne FOB Korea four weeks earlier.

Paraxylene (PX) prices were at $870-890/tonne FOB Korea on 23 January – $90/tonne higher than the week earlier. Prices had risen for nine successive weeks.

PX prices had risen too quickly at the expense of downstream profitability, claimed buyers.

Purified terephthalic acid (PTA) prices edged up by only $10/tonne to $665-670/tonne CFR main port China on concerns over polyester demand.

Fabric sales at the benchmark China Textile City in Shaoxing had fallen to 0.32m metres a day from 1.91m metres the previous week.

Aromatics producers are, however, hoping for an economic recovery in China in the second half of this year.

 The yuan (CNY) 4,000 trillion ($585 trillion) government stimulus package, increased bank lending and other measures - such as the relaxation of labour and environmental restrictions on businesses - might do the trick, say some economists.

GDP (gross domestic product) growth could be as high as 8% rather than the dire warnings issued recently of only 5-6%.

But even 8% would be a long way off the double-digit expansions China has seen for several years – one of the main reasons why such large amounts of new BTX capacity has been built,

In this context, therefore, it is possible that markets will see frequent brief rallies on production cuts and modest restocking by buyers.

 *The 34th Annual DeWitt World Petrochemical Conference takes place in Houston on March 24-26. It will address the state of global aromatics, olefins and derivative markets.

($1 = CNY6.84)

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By: John Richardson
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