INSIGHT: What drives European toluene prices in an illiquid market?

12 August 2011 16:04  [Source: ICIS news]

By Truong Mellor

LONDON (ICIS)--European toluene players have been struggling to read the signals coming from volatile upstream crude and energy markets this week, and current domestic illiquidity means that trying to gauge where spot numbers should be will often depend on where one is in the value chain.

“The market isn’t exactly tight,” said one supplier. “It’s very finely balanced though, with contractual volumes being met but nothing more really available for sale.”

As a result, producers have argued that any additional spot tonnes in the market should be priced according to US levels plus any additional freight costs, as these would be the nearest imports available for Europe.

Certainly, there appears to be nothing coming out of Asia, where toluene prices reached a three year peak towards the end of July on the back of a spike in benzene prices and prevailing tight availability.

While the drop in crude values earlier this week has reversed some of those gains, there is still little incentive for sellers to ship material to Europe, where demand outside of contracted business has been sporadic at best.

“We don’t see any US imports coming in either,” said another seller. “It makes it tough to price material, because without any domestic business there is really nothing to hang your hat on.”

Indeed, the contract settlements in Europe for July and August were fraught with difficulties, as the gap between buyers and sellers has widened over this period.

July contracts settled up $10-25/tonne at $1,100-1,135/tonne FOB (free on board) NWE (northwest Europe), firming on restricted domestic availability, but sellers at the time expressed some frustration that they had not been able to secure larger increases to reflect the supply/demand balance.

Producers felt that with a lack of available spot material due to reduced production output and healthy internal demand, the only option for potential buyers was to import cargo from abroad.

Additionally, fewer parcels coming from eastern Europe, due to higher consumption in the region from derivative sectors, kept supply limited.

As a result, the consensus amongst sellers was that European numbers should have been in line with prices in the Asian or the US markets plus additional shipping and duty costs, bringing values up to the $1,180-1,200/tonne mark.

However, with news of initial July settlements agreed at $1,100-1,110/tonne, this made it difficult for suppliers to push for anything significantly above this.

“It certainly doesn’t help us to make a case for these higher numbers when there are settlements being done at these levels,” explained one producer.

The problem appears to be that with very little spot business happening, there is ongoing discrepancy amongst players as to where values should be. Volatility on crude and energy prices are also confusing the issue, leading to a disconnect between the monthly contract settlements and spot values.

This became more apparent in early to mid July, as offers for material quickly reached $1,200/tonne in light of bullish economic data coming from the US. A surge in Asia also helped support higher domestic numbers, albeit on a notional basis as the European market remained thin.

August contracts were settled at a range of $1,188-1,220/tonne FOB NWE, although a spot deal done around the time of negotiations at $1,245/tonne suggested that the market could have been valued higher.

Other buyers appear unwilling to raise their bids to match these offers, however. One consumer said that with current hydrodealkylation (HDA) and selective toluene disproportionation (STDP) margins running negatively, there is no incentive for them to move price ideas up any further.

One seller countered this by arguing that if buyers were unable to absorb these higher prices, downstream off take would have come down and inevitably led to lower offers in order to retain sales.

But with the market likely to remain thin for the foreseeable future, with spot business in Europe sporadic at best, the only clear way to assess toluene values is to see how much any potential buyers are willing to pay.

($1 = €0.70)

By: Truong Mellor
+44 208 652 3214

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