25 October 2013 10:01 [Source: ICB]
Toluene is used as a solvent and consumed in the manufacturing of toluene di-isocyanate, which is an ingredient of polyurethane (PU) flexible foams. In addition, toluene is used as a blending component in the gasoline sector to boost octane.
Supply in 2013 in Asia was unexpectedly long, although some players expected some tightening, given the upcoming new PX facilities. Although a slew of scheduled turnarounds of close to 30% of the aromatics units in Asia were carried out in early second quarter, availability was still abundant. Also the supply condition worsened, as South Korean and Japanese producers who had export contracts to the US have cut volumes, given the absence of an arbitrage window in most of first half of the year. Even if the arbitrage window opened in the third quarter, with Asia-US spreads at close to $100/tonne, Asian sellers saw little export opportunities, as US buyers were able to restock easily locally or from Europe.
This was evident, given the lower export volumes from South Korea to the US at 6,000-8,000 tonnes from June onwards, while earlier this year, average monthly exports were at more than 10,000 tonnes.
South Korea’s average monthly total exports from January to August 2013 stood at more than 85,000 tonnes. However, the export volume fell to close to 70,000 tonnes in September, as local toluene production decreased because of lower aromatics output on the use of lighter feed and tight pygas feedstock and allocation of more toluene to gasoline blending in the country.
China remained the largest export destination of South Korea, accounting for 30-40% of South Korea’s total exports. China import volumes were on an average of 60,000-70,000 tonnes from April to July 2013, but was much higher at more than 90,000 tonnes in March 2013. Besides China being an important export destination, South Korea exports to India, with an initial contract volume of 10,000 tonnes each month. However, India has contracted more than 20,000 tonnes of toluene monthly, much higher than its monthly requirement of about 15,000 tonnes. Consequently, traders who were supposed to sell a total of 8,000 tonnes of South Korean cargoes each month to India have their orders cancelled by the buyers, as buyers faced mounting stock pressure.
Spot toluene prices on an FOB Korea basis took a dive from the historical high of $1,400/tonne in mid-December 2012, within a single month, weighed down by overall lower aromatics market. Following that, prices were volatile for another month and hovered on an average of $1,300/tonne FOB Korea, with less trading activities, as most players were away from the Lunar New Year festival in early February. Price support did not sustain, and prices were on a steep downward movement until end March, on the back of subdued demand, stemming from accumulating stock levels in the key China market. In the second quarter, prices were hovering at $1,040-1,060/tonne FOB Korea, given less confidence among players.
By end June, prices slumped to a one-year low of $1,032/tonne FOB Korea, undermined by the plunge in energy markets and the mounting inventories of close to 150,000 tonnes in China. However, low pricing did not sustain, but rebounded starkly, as opportunistic demand from the gasoline blending sector surfaced and lasted for a month amid other higher-priced blending components. Towards early September, prices were supported to above $1,170/tonne FOB Korea, by the firmer downstream PX markets. Subsequently, the downward trending kicked in once more ahead of less spot enquiries because of the regional mid-Autumn festival in mid-September and China’s National holidays in early October.
Demand is expected to continue to wane down for the rest of the year, along with the exit of the manufacturing season in both solvent and PU applications. Moreover, the traditional peak driving season has ended, as weather conditions in northeast Asia turned colder, curtailing demand as a blending component in gasoline sector. The restart of aromatics units after their scheduled turnarounds in November will increase supply. Based on such expectation, market players are not confident in price support and expect prices to soften towards the year-end, as long as crude futures do not spike overnight.
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