FocusStagflation stymies recovery in US benzene

25 September 2009 18:22  [Source: ICIS news]

By Landon Feller

High crude squeezes benzene marginsHOUSTON (ICIS news)--High energy prices amid historic high inventories of distillates may signal entrenched stagflation that could delay recovery in US benzene markets, participants said on Friday.

Too much money was moving in energy commodities and supporting crude oil prices in the upper $60s/bbl or higher, according to refiners and benzene producers. At the same time, demand remained low for crude-oil products.

If crude oil prices remain high and the downward price trend continues for benzene, participants said US producers may look to buy the benzene instead of make it.

Benzene is the largest-volume aromatic chemical feedstock and depends heavily on demand from packaging and consumer goods markets, as well as the automotive and construction sectors. But end-user demand for benzene is weak across the board, from styrenics to polycarbonate (PC), nylon and even phenolic resins.

“We would like to see crude around $60/bbl, toluene and gasoline under $2/bbl. The benzene contract could be $2.50/gal and that would be fine for everyone,” a US Gulf coast producer said.

“It would give stability to pricing and leave margin at each link in the chain. As it is, the bullish commodity markets are hurting us,” the producer said.

September benzene contracts dropped 24% from August to $2.79/gal, and spot prices have since ebbed lower still to $2.60-2.73/gal FOB (free on board) US Gulf on 24 September.

The gravity of the situation for high-cost, low-demand aromatic feedstocks was highlighted by the negative spread of spot mixed xylenes (MX) to toluene, where toluene values have only recently backed away from benzene prices in the $2.45-2.65/gal band.

Under normal circumstances, aromatics producers need to achieve higher prices for xylene than toluene to ensure sustainable profit margins. Spot toluene was notionally near parity with MX, in the $2.10s/gal, after weeks of 10-cent or greater premiums.

In The Plaza Group’s monthly chemicals report, company vice president Wilf Kimball said the 86 cent/gal reduction in benzene contracts from August to September rattled the market’s expectations.

Kimball cited “some rationale for a further reduction, but forward month trades are showing only a modest 5 -10 cent differential. Our opinion is for the balance of 2009 ... there will not be an appreciable difference in pricing.”

Benzene prices will get no boost from end users, who see demand remaining weak.

“Some benzene customers are telling me they’re on the bottom of the demand curve and see nothing improving,” a seller said.

“Even if demand is up a few percent next year, you have to remember these guys’ business was down 50% after last year. That’s the stark cold reality,” the seller said.

Although product prices and demand are declining, NYMEX crude oil values have remained firm between $65-75/bbl for months, leaving refiners to be bludgeoned by an inability to preserve margin in refined products, participants said.

“Cutting back utilisation increases per-unit cost and just makes things worse, and still they need to do more,” a US aromatic feedstocks producer said.

According to the Department of Energy (DOE), capacity utilisation of US refineries was at 85.6%. US benzene producers estimated that production would outpace demand at any rate above 80%.

“There really are no positive expectations for domestic benzene in the near term,” a producer said.

Indeed, talk of a general economic recovery is premature, said a commodities analyst in Houston.

“You like to think you’re at the bottom, that you’ve fired everyone you’ll have to fire,” a styrene producer said. “But the bailouts and infusions and government spending now seem to be frittered away and doing nothing for the economy or for infrastructure.”

At the current pace, that point in the future when chemical markets recover is getting farther away.

Major US benzene producers include BP Chemical, ExxonMobil, Flint Hills Resources, LyondellBasell, Shell, Sonoco and Total.

For more on benzene visit ICIS chemical intelligence
To discuss issues facing the chemical industry go to ICIS connect

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By: Landon Feller
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