Toluene is used to produce synthetic drugs, pesticides, toluene di-isocyanate, benzene, both mixed and paraxylenes, benzyl chloride and benzoic acid. It can be used directly as a common solvent such as in paints, thinners, adhesives and disinfectants – mainly within southeast Asia. Toluene is used as an octane booster for higher-RON gasoline.
At the start of 2018, demand was robust from Chinese and Indian importers because of stocking up before the Lunar New Year and replenishment amid positive distributor margins. Buyers took a break in H2 March and April to digest their cargoes at the public shoretanks in both regions. Demand regained momentum from May, in line with the crude uptrend, because of restocking after inventory levels hit lower-than-usual levels in both India and China.
Demand from the key downstream toluene disproportionation (TDP) units was strong through January and April because of positive spreads for benzene and xylenes production. The healthy margins for paraxylene products provided impetus for stocking up on toluene cargoes as well from the selective TDP units in South Korea and Thailand. However, a reversal in the demand trend emerged in May after benzene demand remained lacklustre and spreads were close to falling beyond the breakeven level.
Supply has been generally long between January and end-April, owing to the stable operating plant rates and overall sufficient availability in southeast Asia which is a key net exporter within the region. Availability of northeast Asian cargoes was curtailed at times because of turnarounds.
However, southeast Asia-origin cargoes made up for the loss in production in the other side of the hemisphere. Spot exports from Malaysia have been particularly prevalent, a trend that emerged only in 2018, because of the debottlenecking at Lotte Chemical Titan’s unit and lower domestic obligations.
Prices have been volatile in all markets within Asia. The overarching price trend in the first three months was up. Subsequently, the market fell back down after all replenishing activities were completed, with FOB Korea prices falling to the lowest point at $673/tonne.
After hitting the lowest point for the first half of 2018, prices found support, with buyers starting to procure competitively priced cargoes since they believed the overall market was hitting a bottom. This was against a backdrop of a narrow toluene-naphtha spread – below $80/tonne.
In Asia, there are two key production methods for toluene. The first is extraction from pyrolysis gasoline (pygas), which is produced from steam cracking of light naphtha. The second is the extraction method from reformate, which is produced from a reformer via the cracking of heavy naphtha.
Chinese domestic demand-supply will be the key game changer going forward into 2019, as government taxation reforms in the gasoline market will likely result in changes with overall trader and end-user perceptions. The country implemented a new online tax (consumption and VAT) filing system for gasoline and this could effectively swing the market both ways. Domestic toluene supply could be limited from state-owned refineries if they need to increase gasoline production and cover their shortfall, since private blenders may become obsolete.
Downstream TDI demand-supply fundamentals may also result in potential market shifts as well. With new plants like Wan Hua Chemical and restarts such as BASF’s Ludwigshafen expected by the third quarter of 2018, there is a possibility that demand in Asia could go either way. Demand may go up because of the need for these plants to run, but it will act as a double-edged sword since TDI supply will increase and it may result in an imbalance in this market.
Narrower or continuously narrow TDP spreads will be a third key determinant in demand-supply changes. Already, smallersized TDP plants have been shut or looking to cut rates since mid-May because of squeezed producer spreads and expectations that benzene demand-supply is unlikely to improve in the short run.