Benzene has always been the blog’s favourite indicator for the economic outlook. It has the most number of applications, due to its head-start in being a major product when coal was the main feedstock. Equally, paraxylene (PX) is an excellent indicator of demand in emerging economies, as their rise in living standards leads to greater use of polyester-based products.
The chart shows the US$ ‘spreads’ of the 2 products versus naphtha, in real (inflation-adjusted) terms, using European prices to enable comparison across the past 30 years. It highlights how:
• Benzene spreads (green line) have remained within a $150 – $400/t range for most of this period, with gasoline market changes driving weakness in the late 1990s and strength in the mid-2000s.
• PX (purple) has seen much more volatility. This was mainly caused by gasoline markets, as xylene availability depends critically on refiners’ need for octane.
The chart also shows, however, that the 2004-8 SuperCycle led to a similar upturn in ‘spreads’, to that seen for olefins. Demand during this period was very strong, due to central banks’ policies of stimulating the core petchem sectors of housing and autos via lower interest rates.
But there was no real sign of strength in the spreads during 2010. Benzene recovered a little, and PX weakened, but both were in the centre of the historical range. And this was in spite of central banks around the world flooding financial markets with liquidity, on an unprecedented scale.
This is further support for the argument that demand was not the key cause of the tight markets often seen during 2010. And the fact that olefin spreads rose, whilst those for aromatics stabilised, highlights a key difference versus the picture of strong overall petchem demand seen during the SuperCycle.