Direction unclear for Europe toluene market in second quarter
Truong Mellor
17-Mar-2014
Focus article by Truong Mellor
LONDON (ICIS)–Thin
spot activity and softening global values are weighing down
on European toluene sentiment, sources said on Monday,
although there are various factors that could drive the
market in the second quarter, leaving many unsure of its
future direction.
Following the settlement of March contracts at
$1,125-1,127/tonne on a FOB (free on board) NWE
(northwest Europe) basis, buyers felt that there was
little incentive for them to pay higher than this for spot
material, as demand outside of contract was limited.
Despite supply restrictions in Europe
since January, sources had not seen any players scrambling
for material to cover positions, indicating that demand
outside of contractual volumes remains limited overall.
Falling prices in the US as well as in
Asia, where FOB Korea numbers dropped to a 20-month low late last week in
tandem with the fall in downstream paraxylene (PX), are also
keeping European buyers bearish towards the end of the first
quarter.
While traders had previously been eyeing
the arbitrage window into the US in late February, prices in
the region have edged lower since then amid
limited activity.
The European toluene market has
increasingly been an export-driven one, with 2013 showing a
26% rise in exports from the previous year. This trend has
been driven by the twin pressures of weak European demand and
a strong US market steering global pricing.
There was also some speculation earlier in
the first quarter that the US driving season would support
strong toluene demand in the region. Toluene is used as a
high octane booster in gasoline fuels.
However, with toluene prices in the US
moving below $3.70/gal FOB last week, cheaper xylene
has become more attractive for the gasoline blending sector.
European numbers would have to move down to around
$1,050/tonne in order to make exports to the US economically
viable.
Offers for the second half of March
were heard at $1,140/tonne, but there was no corresponding
buyer interest. Without any export opportunities from Europe
to other regions, this was curtailing any demand
traders.
But with benzene spot prices showing
signs of edging back up above
$1,400/tonne due to limited availability at least in the
short-term, there was talk at the European Petrochemical
Luncheon (EPL) in Madrid last week that the spread over
toluene would support HDA (hydrodealkylation) production,
where toluene is converted into benzene, which could
potentially support strong toluene demand.
However, some players remain
sceptical of any sustained on-purpose benzene production in
Europe due to market volatility.
“We
have seen the benzene/toluene spread open up, even
earlier this year,” one trader said. “But the problem is that
it isn’t like a switch you can turn on and off. It depends on
whether the economics will remain in place for at least four
to six weeks.”
And with global benzene prices easing off
and a growing sense that the market is facing a global
downwards correction on pricing following the volatility seen
since late 2013, several sources do not expect the spread to
stay wide enough for long enough to make HDA production
viable. (see chart right)
Although the two products in Europe have a markedly different dynamic in terms of spot liquidity, they are plagued by the same fundamental pressures on supply.
And while toluene can be used for benzene and xylene production, as well as in the gasoline blending sector, it is also used to make various solvents and also in the production of toluene di-isocyanate (TDI) for urethanes and foams. With a myriad of potential applications, this also further complicates any outlook on pricing and demand.
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