OUTLOOK ’11: China demand holds key to Asia toluene prospects

By Mahua Chakravarty

SINGAPORE (ICIS)--China’s growing toluene demand, mainly fuelled by its booming automotive sector, will likely support prices of the aromatics product in Asia next year, industry sources said.

At noon on Tuesday, toluene prices were at $950-960/tonne (€722-730/tonne) FOB (free on board) Korea, up by $5/tonne from Monday's close. Current prices were up by $25/tonne or about 2.7% higher from levels at the start of the year, according to ICIS data.

Toluene is used in a number of solvent applications in paints and coatings, and is also used as an octane booster in gasoline.

“It may seem on [the] surface that China is importing less and less… [but] demand for toluene into blending, coatings and paints is growing [as] the car industry is big in China,” said a key regional trader.

Vehicle sales in China was projected to hit more than 17m units this year, according to the China Association of Automobile Manufacturers. Last year, China surpassed the United States as the world’s biggest automobile market, with sales of more than 13m units.

Toluene demand prospects were strong for gasoline blending, with projected growth of more than 10% this year, industry sources said. Demand for solvents, on the other hand, was expected to grow at a moderate 3-5% pace, said a key east China-based importer and distributor.

These projected demand growths were firmly backed by expectations that China will continue its superior economic expansion compared to western countries, with annual GDP growth at around 10%.

China, the biggest emerging market in Asia, is the region’s largest toluene importing nation, taking in an average of 50,000-60,000 tonnes/month of the product in 2010, according to industry estimates.

However, a number of Chinese importers lost money betting that toluene demand for blending would take off this year, industry sources said.

They had locked themselves in for about 40,000 tonnes/month of term volume in 2010, which just sent inventory of the material to record highs in east China shores from the first quarter of the year, they said.

Most end-users mostly opted for mixed aromatics, which were in ample supply, instead of toluene in 2010, traders said.

China had continued to take in strong toluene supply, even as its domestic production capacity had rapidly increased in the past few years, industry sources said.

Wary of the prevailing oversupply of imported and domestically produced material, a number of Chinese importers were cutting their 2011 term supply volumes by as much as half, they said.

Regional sellers, on the other hand, were looking towards other markets with good economic prospects such as India and Vietnam, market sources said.

India is a net importer of toluene, taking in about 10,000-12,000 tonnes/month of the aromatics product originating from southeast Asia, South Korea, Iran and Europe.

The country uses toluene for downstream applications in pharmaceuticals and specialty chemicals sectors.

“India is important for toluene,” said a regional trader.

India’s total toluene import volume in 2010 was at about 150,000 tonnes, with its demand estimated to grow at about 7-8%.

In southeast Asia, Vietnam presents good import opportunity for sellers, the traders said.

However, the deluge of interest from northeast and southeast-Asian sellers to export to southeast Asia and India was now causing an oversupply, said regional traders.

Inventory levels in Malaysia have been high in the recent months because of the influx of imports, and this was depressing local market demand and prices, they added.

($1 = €0.76)