INSIGHT: Weak demand, oversupply cloud Asia aromatics

04 June 2010 11:26  [Source: ICIS news]

By Malini Hariharan

MUMBAI (ICIS news)--Asian aromatic markets have been complicated by a number of issues that are making it difficult for participants to figure out the outlook for the next quarter.

The problem is not only volatile crude prices but also demand, which is usually strong in the second and third quarters. This year, however, it is missing.

The US gasoline season, a key driver of Asian benzene and toluene markets, has started on a slow note. Asian benzene demand has also been affected by maintenance shutdowns at styrene plants and operating troubles. And in China, refiners have been using methyl tertiary butyl ether (MTBE) rather than toluene for gasoline blending, as the former is more attractively priced.

The net result is oversupplied benzene and toluene markets, which have depressed prices over the last few weeks.

Asian benzene prices dropped 18% in May and were at $810-820/tonne (€664-672/tonne) FOB (free on board) Korea on Friday, according to global chemical market intelligence service ICIS pricing. Toluene prices fell 17% and were at $740-750/tonne FOB Korea.

“Benzene and toluene have been very volatile. This is usually a good season for BTX (benzene, toluene, xylenes), but we are in a situation that no one has seen before,” explains Leonard de Guzman of consultancy Dewitt & Co.

Asian producers had ramped up output at reformers and pyrolysis gasoline-based units in anticipation of strong demand in May. And now, despite the downward pressure on prices, producers are hesitating to trim operating rates, as they do not want to be caught with low stocks once gasoline demand kicks in.

“Though the market is long now, the volumes can be easily consumed when demand comes,” says de Guzman.

But when that will happen is still uncertain. The US is said to be awash with gasoline, and summer driving is predicted to remain much lower than what it was two years ago.

The US Energy Information Administration's (EIA) Gasoline Summer Consumption and Supply report predicted an increase of just 0.9% in gasoline consumption this summer, but gasoline stocks were about 7m bbl, or 3%, higher than the start of the 2009 driving season.

This has left producers such as the Chinese refining and petrochemical major Sinopec struggling with a build-up in stocks.

De Guzman estimates that Sinopec is holding about 40,000 tonnes of benzene in inventory, nearly double the normal level, because of weak demand from the styrene sector.

“Sinopec initially planned to slash local prices in order to export benzene in June, but that was foiled by a fall in FOB Korea prices. Sinopec cut local prices and the FOB market dropped alongside them. So they're back to square one, with prices too high to export significant amounts,” says de Guzman.

It is estimated that Chinese companies have sold about 30,000 tonnes at $760-800/tonne FOB China, of which around 10,000 tonnes will be shipped to Europe.

Europe can take more benzene and toluene, but vessel availability is an issue. Exporting to the US is not an option, as that market is oversupplied and has seen a sharp fall in prices.

De Guzman predicts that Asian benzene will be slow to recover as the global inventory situation still has to be resolved.

The key, he says, is operating rates at reformers – will they be cut, or will producers keep them running in expectation of the summer gasoline demand and also a recovery in styrene demand?

Read John Richardson and Malini Hariharan's Asian Chemical Connections blog
For more on aromatics visit ICIS chemical intelligence

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By: Malini Hariharan
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