By John Richardson
SOMETIMES petrochemicals markets defy reality, on the occasions when pricing moves out-of-synchronicity with the underlying nature of demand.
This is the case with benzene today (see the above pricing chart) as my ICIS colleague Truong Mellor describes, in this excellent Insight article.
He says that:
*European Benzene pricing has been bullish, as a result of the adoption by cracker operators of cheaper ethane feedstock and liquefied petroleum gas (LPG), both of which yield less pyrolisis gasoline than naphtha.
*This trend is likely to continue globally as supplies of paraffinic crude grades, such as Eagle Ford and Bakken in the US, which yield less aromatics through the refining process, grow.
*Benzene supply in Asia this year is being diverted towards derivative units in China as numerous phenol and bisphenol A (BPA) plants come on stream. Asia has traditionally been a key exporter to the US.
*Coal-based benzene production output has also been reduced since the downturn in the Chinese steel industry from 2008. Coal-derived benzene accounts for approximately 20% of Chinese production.
And, of course, oil prices have remained far-too high, thanks to speculation. The cost of oil, which underpins the price of benzene, does not reflect the real nature of the global economy.
Earlier, one could argue that long-term supply was constrained and that China would continue to voraciously consume the limited availability.
But shale oil has contributed to a major shift in the supply outlook and China is slowing down. The prospects for other emerging markets also appear weaker.
Perhaps some good news for crude pricing might be the perception of a stronger using economy, prompting the Fed to do more than just hint about reining back its bond-buying problem.
This would strengthen the dollar and thus lower the value of oil as a “store of value”. The prospect, or reality, of higher interest rates would also make gambling on crude more expensive.
And/or demand destruction, resulting from the real state of the global economy, will continue to erode crude pricing – along with much-longer supply.
As far as benzene supply goes, Truong adds: “Combined with a largely pessimistic outlook for chemicals demand in the near to mid-term, it seems that benzene availability and pricing will continue to plague the downstream.
“Unless there is a determined effort from the market to arrange for further extraction capacities, the only path to redressing the global balance of benzene is [also] through demand destruction.”
These are incredibly difficult and complex times for petrochemicals, even if, right now at least, the benzene spread over naphtha (see chart below) remains very good.