EPCA '13: Europe aromatics to focus on impact of wider economy

06 October 2013 13:00 Source:ICIS News

BERLIN (ICIS)--European aromatics players will be focused on wider macroeconomic uncertainty during the 47th European Petrochemical Association (EPCA) meeting in Berlin, Germany, this week, and the potential impact this will have on petrochemical demand and pricing.

Spot activity in the European benzene market has been thin in the weeks leading up to October, following a volatile year on pricing (see chart).

benzene

“We are a long way from the start of 2013,” said one trader. “There was a record high monthly contract settlement for January, and an expectation that the bullishness would continue.”

However, weak phenol demand throughout 2013 and structurally firm benzene costs have kept offtake from key industries, such as construction, limited. With several European governments pursuing a path of economic austerity, this has also curtailed end user activity and consumer confidence this year.

European benzene numbers reached a yearly low in July, and while stronger global pricing helped support an upturn in August this was subsequently short-lived. September proved to be a directionless month on spot pricing and demand, with ARA numbers drifting south again.

“The market came down in line with the US,” said one trader. “We currently see good supply and weak demand.”

With a thin market, however, there is always the potential for a sudden shift in direction should circumstances change. A spike in demand or an emerging production outage could always push prices up suddenly.

Players at EPCA are likely to be looking at the macroeconomic environment to try to gauge any sense of direction for benzene, as well as the continued impact of the shale boom and its effect on naphtha-based refining in the future.

Alongside the closure of Total’s naphtha cracker at Carling, France and the potential impact on benzene, there are also several styrenics closures on the horizon following a period of rationalisation towards the end of 2012.

The story of European styrene in 2013 has been one of unpredictability and volatile pricing, with the direction of the market often confounding its participants (see chart).

styrene

While a host of turnarounds earlier in the year were expected to tighten the market and push prices up, weak derivative demand kept a lid on potential increases, while US imports actually lengthened the market.

Meanwhile, with benzene pushing up, production margins were squeezed, with the spread moving from over $400/tonne (€296/tonne) to below $200/tonne within three months (see chart).

benzene styrene spread

However, styrene prices began to firm as benzene bullishness waned during the second half of the year. A combination of weak propylene oxide (PO) demand, fewer imports due to a strong Asian market and European production outages galvanised the market.

As prices reached record highs by early September – and have subsequently seen a sharp downward correction – many players attending EPCA will be focused on the impact this volatility will have on derivative demand patterns.

“The thing with the styrene market is that you can always expect the unexpected,” said one aromatics trader. “That makes it hard to predict.”

Nevertheless, there has been a renewed focus on the PO market and PO/SM (styrene monomer) production, with several styrene players arguing that this part of the equation in Europe will be key to understanding supply/demand dynamics.

Certainly during the upcoming winter period – traditionally a peak season for PO demand – the impact of PO/SM units on styrene availability could prove to be key in pricing developments.

Meanwhile in the European toluene market, spot activity remains limited by the twin pressures of lacklustre demand outside of contracted volumes and limited availability in a balanced market. With several toluene di-isocyanate (TDI) plants scheduled to begin operations in the coming years, this will help keep domestic supply finely balanced.

2013 has seen an increase in exports out of Europe in order to maintain this balance. European statistics agency Eurostat figures show that exports from the EU have risen by 41% during the first half of 2013 compared with the same period last year, an increase of over 35,000 tonnes.

The US market is likely to continue steering global direction in the coming months. European pricing will be aligned with prices there and move in order to keep the arbitrage workable, although limited spot volumes may see sellers resist some of the downward pressure as it emerges.

US pricing was also a key factor in the European xylenes market (see chart) this year, with domestic mixed xylenes (MX) numbers taking their cues from a bullish aromatics sector in the second half of 2013.

mixed xylenes

However, several players believe that the European MX market is due for some significant downward correction in the coming weeks. The recent gains for feedstock MX have not been supported by either paraxylene (PX) or orthoxylene (OX), with the spread between MX and the other grades unappealing for buyers.

“The problem for Europe is that even when US numbers firm and the arb [arbitrage window] opens up, any exports from Europe will be limited by the high ASTM [American Society for Testing and Materials]/Bromine specifications for MX,” one trader said.

There is talk of several producers fixing vessels for exporting PX abroad, primarily to Asia for arrival in the fourth quarter. Sources in the region have noted that up to 100,000 tonnes of deep-sea PX is arriving by end-November/early December, the majority of it sourced from the US Gulf region, while 10,000-20,000 tonnes will be coming from Europe.

Balancing supply through exports has been a growing trend throughout 2013 in Europe amid poor derivative offtake, and the future of key derivative markets amid challenging macroeconomic conditions will be a key talking point at EPCA this year.

($1 = €0.74)

By Truong Mellor