By Truong Mellor
LONDON (ICIS)--Fundamental changes in the Asian landscape, an uncertain macroeconomic outlook and bearish sentiment among derivative players are likely to keep sustained pressure on the European paraxylene (PX) market and the monthly contract negotiation process in 2014.
Asian PX capacity grew by over 3m tonnes in 2013 to top 31m tonnes, according to ICIS data, and is expected to see approximately double this growth in 2014 to reach a total nameplate capacity of close to 40m tonnes.
While downstream purified terephthalic acid (PTA) nameplate capacities in Asia outstrip this volume, weak macroeconomic conditions and poor performance from the polyester sector has left the outlook for demand bearish, and the prediction is for ample PX availability and downward pressure on pricing in 2014.
The impact of this on the European market will be significant, as it is the price movements of Asia that govern discussions regarding the monthly contract price. 2013 already saw players in the Asian market fail to reach an agreement on the monthly Asian Contract Price (ACP) four times, which hampered negotiations in Europe.
Spot market volatility and a failure to reach consensus for the February ACP have already cast a long shadow on the European market this year, and many domestic players are braced for further difficulties as 2014 unfolds.
While an initial European price for January was agreed at €1,067/tonne on a free delivered (FD) northwest Europe (NWE) basis between one buyer and one seller, an increase of €12/tonne from the previous month, the subsequent plummet of the Asian spot market meant that this failed to garner any further support from European players.
Several buyers elected to roll over process from December, while others have waited until February to come to an agreement that covers both months of 2014 so far.
There has been an initial agreement for February at €975/tonne FD NWE, with an understanding that the downward movement would preclude acceptance of the initial January number at €1,067/tonne.
One supplier confirmed that it had followed the initial February settlement with one consumer, and expects that it will be able to gather further support from other customers this month.
“Looking at the Asian spot market which has bounced back a little since earlier in the month, the €975/tonne number looks good from a buyer’s perspective.”
Asian spot prices have been hovering in the low $1,300s/tonne mid-month on a cost and freight (CFR) basis, with some short covering helping to boost numbers amid continued weak derivative sentiment.
Despite the emergence of some consensus for February following a muddied January, many European players have expressed concern that the monthly contract price will face continued challenges going forward in 2014.
With the Asian contract talks increasingly stalled in 2013, there was talk in Europe last year that players here would have to adapt in order to reach a monthly agreement that accurately reflected market dynamics.
Furthermore, a monthly number that proves to be out of sync with the month as it unfolds can be harmful to both buyers and sellers. This was evidenced in early 2013 when the April contract saw a hefty €130/tonne drop to counteract a high settlement the previous month and the subsequent weakness in Asia.
Sharp price volatility between months makes it difficult for anyone in the market to make forecasts for demand, and limits any potential for a sustained recovery in a market that has struggled with bearish offtake and macroeconomic uncertainty.
Additionally, with fewer European players involved in the monthly contract talks due to the spectre of rationalisation and downstream plant shutdowns, this has made getting any widespread consensus around a number that much more difficult.
There have also been concerns raised by some players that the European PX contract process is becoming increasingly skewed towards DMT economics, which is potentially harmful to the polyester chain as a whole.
While European PX producers were able to curtail output and boost exports in 2013 to help create what one consumer described as “a semblance of balance” – something evidenced by Eurostat figures last year – the shift in the Asian market in 2014 will mean that there will be less demand for import volumes from other regions.
“Europe really needs more domestic PX/PTA conversion,” said one PX buyer. “The PX numbers will have to come down in 2014 to help support this.”
INSIGHT: Europe PX contract to be fraught with difficulties in 2014
By Truong Mellor