OUTLOOK ’18: Asia IX length to persist as demand struggles to keep pace

SINGAPORE (ICIS)–The isomer-grade xylenes (IX) market in Asia will remain oversupplied in coming months, as downstream demand has lagged behind fresh production capacities this year.

A slew of new production capacities have added to the length in the region, with latest additions include China’s Sinopec Jinling Petrochemical’s aromatics facility in Nanjing, Jiangsu province. The facility, with started up 18 November, is able to produce 400,000 tonnes/year of xylene.

In China, two plants, one in Hainan and the other in Guangdong, are expected to start up in the second half of 2018, adding a combined capacity of 480,000 tonnes/year.

Although new capacity additions will slow in 2018, downstream demand is likely to see a significant increase. A number of downstream paraxylene (PX) plants are expected to start up over the year as well, but impact on IX will be minimal as the plants are largely fully integrated.

The surplus supply in the market, exacerbated by an unworkable arbitrage to the US, has pressured prices lower so far this year.

Spread between FOB (free on board) Korea IX and CFR (cost & freight) Japan naphtha has dwelled below the $170/tonne mark since September this year.

The break even spread for IX is considered to be around $160-180/tonne.

Despite unprofitable margins, production is unlikely to slowdown, with some producers brushing off low spreads.

“For us, it does not matter if IX makes a profit or not, the cargoes just have to be sold,” said a producer in northeast Asia, adding that overall aromatics margins were the main focus.

Isomer-grade xylene is produced alongside benzene and toluene, and producers tend to look at margins of the three products as a whole rather than focus on just one.

Benzene margins have been the key factor supporting aromatics production in the region, with the spread between benzene and naphtha ranging between $224.50-525/tonne so far this year.

Term contracts for 2018 have so far been concluded at lower levels compared to the previous year, a sign post of a weaker market ahead.

In Taiwan, state-owned CPC Corp, for one, has committed close to 20,000 tonnes/month in total to its term buyers at a discount of between $11-13/tonne on a FOB Korea basis, sources said. Its 2017 term cargoes were sold at a slight premium to FOB Korea prices.

Northeast Asian traders have sold the term cargoes to Taiwan’s largest buyer Formosa Chemical and Fibre Corporation at discounts of around $12/tonne on a CFR Taiwan basis, a steeper discount than 2017 contract prices of around CFR Taiwan minus $9/tonne, sources said.

With the supply overhang expected to persist in 2018, China import demand will remain in focus as a main price driver for spot cargoes.

China is an intermittent importer of IX cargoes, but has in recent months picked up a substantial volume of spot material, easing the supply overhang in Asia.

Market sources expect to see at least 30,000 tonnes of IX hit China’s shores in December.

The recent import spurt was driven by gasoline blending demand, as the disparity between domestic Chinese Yuan prices compared with imported US dollar prices was quite stark.

Further sparking buying interest in IX was the narrow spread to fellow octane booster toluene.

“Some traders will prefer to take IX over toluene for gasoline blending even if it’s a bit more expensive because IX can also be used as feedstock for PX and OX,” a xylenes trader said, adding that toluene was also a more difficult material to handle.

But demand as a gasoline blending component also hinged on the Chinese government’s decision on the consumption tax for solvent-grade xylenes (SX), a substitute for blending.

Currently IX cargoes benefit from a lower tax rate, which shrinks the spread between IX and SX cargoes headed into China.

Outlook article by Deborah Lee