Europe benzene direction unclear for September and Q4

Focus Article by Truong Mellor

LONDON (ICIS)–Following the triple-digit drop in the European September benzene contract earlier this week, players in the market remain unsure of where the market will go this month, sources said on Wednesday.

“We are trying to understand where the European market is going,” said one benzene trader. “Demand is there, but cargo is not tight, Crackers are running okay, they have some good margins.”

The European September benzene contract was settled at €519/tonne, down €260/tonne from the previous month ($585/tonne in US dollar terms). This is the biggest monthly drop in the contract price since November 2008, and the lowest settlement in euro terms since May 2009.

August saw benzene spot levels gradually ease off amid limited activity and weakening crude oil numbers. China’s surprise devaluation of its yuan currency versus the US dollar in mid-August also led to fears that Chinese consumers would import less regional product and increase overall global availability.

Yet despite the wider macroeconomic bearishness stemming from the collapse of Asian stock indices, European aromatics traders were still seeing reasonable derivative demand.

“Styrene demand is okay,” said one benzene trader late last week. “We are seeing a decent throughput. Phenol is struggling a little, but that is more to do with poor economic for (co-product) acetone.”

But with price drops reminiscent of late 2008, there is still some uncertainty among industry players surrounding market direction for the rest of the year.

One downstream nylon producer highlighted the disconnect between crude oil, which has shown signs of tentative recovery since last week, and the huge drop on the benzene contract.

The producer said: “It seems there’s a sort of time shift between benzene and oil. This kind of situation is putting a lot of confusion in the market – it’s extremely dangerous to buy right now.”

However, many benzene players felt that the European market had been overpriced for some time given global developments, so the downward correction was needed to get European prices in line with other regions.

“Fundamentally the European market is okay,” said one benzene trader. “People have simply been waiting to buy because a price drop was inevitable with the slump in Asia and energy losses. There has been some panic in Asia, especially on styrene, and people saying that it feels like 2008 again, but demand is still there.”

A benzene trader echoed this sentiment: “There is a little bit of panic. Derivatives move lower and everyone minimises their stock positions. The problem is that this creates a cycle of volatility and sudden shortness in the market.”

One caprolactam producer felt that with benzene spot numbers dropping to levels not seen since early 2009, the key to the aromatics chain now was finding some sort of new equilibrium on pricing.

The producer added: “We have to adjust to a new reality. The shale bubble has burst now. A big drop on benzene in September means we can salvage margins and pass some of this on, but the market could start pushing upward again before October.  The volatility is the real problem. Some sort of trend is what we need, something to work with.”

There are some players who feel that with a sharp drop in feedstocks and the end of the summer holiday period, European derivatives could see a strong upturn this month as consumers return to the market.

One styrene consumer late last week said: “We are seeing really strong demand from polystyrene (PS) and EPS (expandable polystyrene) for September. There are more buyers than sellers now. Stock markets have been recovering for three or four days now, and even benzene spot numbers have moved higher.”

Indeed, after dropping to a six year low early in the week, European benzene spot levels edged back up above $600/tonne by Friday 28 August, buoyed by some macroeconomic recovery.

September benzene was valued at $600-625/tonne CIF ARA on Tuesday 1 September while October was firmer at $610-635/tonne. However, some losses in the US Gulf market were weighing down on prices this morning. Offers for September were at $590/tonne while October remained in contango with offers at $600/tonne.

However, other downstream players remained unconvinced that there would be any significant upturn, citing the steep backwardation on styrene in particular as an impediment to demand recovery.

The September styrene barge contract was agreed yesterday at €1,200/tonne FOB ARA, a reduction of €100/tonne from the previous month, but there is still a sharp backwardation into the second half of the month and further still into October.

Offers for September styrene were at $1,130/tonne FOB this morning and the second half of the month saw offers at $1,100/tonne while October was valued at $900-1,000/tonne.

One styrene trader said: “If demand was so fantastic this month we would see industry players buying, but we don’t. Polymer buyers are taking less volume, and everyone will expect a lower October [styrene] contract again.”

Elsewhere, styrene players pointed out that there are several Asian and Middle East turnarounds between now and November which could help support a rally in global pricing towards the end of the year.

Mark Victory contributed to this article