OUTLOOK ’20: China’s further PX expansion may bring more MX demand

Author: Veronica Zhang

2019/12/26

SINGAPORE (ICIS)--China’s paraxylene (PX) sector will see further capacity expansion in 2020, which is expected to support the mixed xylenes (MX) market.

However, squeezed margins for PX producers may curb the overall demand for the feedstock.

Prices of MX in China were volatile in the second half of 2019 following nearly half a year of narrow fluctuations because of the change in demand caused by rapid capacity expansion in the PX market, the largest derivative of MX.

MX is a relatively upstream product in the petrochemical industry.

Therefore, spot prices usually have a strong positive correlation with crude prices and a negative correlation with spot inventories at ports. However, this seemed not to be the case in 2019.

An influx of Iranian cargoes at the end of the first quarter of 2019 pushed up port inventories significantly after the Lunar New Year holiday (4-10 February). Crude prices fluctuated narrowly during that time.

However, spot MX prices were stable against this backdrop.

This performance was mainly attributed to spot demand from PX units at Fuhai Chuang and Hengli Petrochemical.

Fuhai Chuang gradually raised its operating rate in early 2019, while Hengli Petrochemical conducted trial runs at the end of the first quarter.

Therefore, both producers actively bought feedstock MX.

The resulting strong overall demand absorbed the inventories mounting at ports and contributed to the stability of the MX market.

In the third quarter of 2019, the macro economy was bearish due to persistent China-US trade frictions and low crude prices.

However, spot MX prices surged for three consecutive months, and even opened the import arbitrage window which had been closed for one year.

This strong uptrend was mainly supported by demand from PX producers and the gasoline blending market.

FuHai Chuang gradually restarted two PX units in the third quarter, while some reformers at Hengli Petrochemical were shut down for maintenance.

Spot MX prices increased due to less supply and more demand.

In addition, the domestic MX market entered the traditional peak season from September.

Gasoline blenders were active in buying MX to build up stocks before the National Day holiday (1-7 October).

The uptrend in spot MX prices accelerated on the surge in demand, increasing by more than yuan (CNY) 1,000/tonne in September.

The import arbitrage window opened as a result, boosting the import market which had been subdued for a long time.

In the fourth quarter, maintenance at some PX units and falling gasoline prices dampened the demand for MX and dragged down spot MX prices.

Demand from PX producers was the most direct and important factor affecting spot MX prices in 2019.

Major PX units coming on stream in 2019 belonged to Fuhai Chuang, Hengli Petrochemical and Hainan Refining & Chemical, with different feedstock integration.

Hengli Petrochemical has reformers with capacity matching the demand from PX unit.

FuHaiChuang’s demand is partially covered by its own MX output.

Hainan Refining & Chemical needs to buy all MX cargoes from the market.

Net demand for MX increased by up to 1.7m tonnes/year, giving strong support to the uptrend in spot MX prices.

Table 1: China’s new PX capacity in 2019

PX capacity MX shortage Start-up date
Fuhai Chuang 1.6m tonnes Around 500,000 tonnes Dec-18
Hengli Petrochemical 4.5m tonnes - 2019 Q1
Hainan Refining & Chemical 1m tonnes Around 1.2m tonnes Sep-19

Table 2: China’s new PX and MX capacity in 2020

PX capacity MX capacity Start-up date
Zhejiang Petrochemical 4m tonnes 4m tonnes Dec-19
Sinochem Quanzhou phase 2 800,000 tonnes 800,000 tonnes (combined with phase 1) 2020 Q2
Zhongke Refining & Chemical - 400,000 tonnes 2020 Q2

Zhejiang Petrochemical is gradually starting up reformers and PX units of its phase 1 project.

The designed MX capacity completely matches the PX capacity. Therefore, Zhejiang Petrochemical does not need to buy MX from the market and will not sell MX to the market when units achieve normal operation.

Sinochem Quanzhou’s phase 2 project includes an 800,000 tonne/year PX unit, which is integrated with a BTX extraction facility.

The total designed MX capacity of phase 1 and phase 2 will exactly match the demand from the new 800,000 tonne/year PX unit.

Sinochem Quanzhou’s phase 1 project can produce around 700,000 tonnes/year of MX.

Almost all the cargoes from this phase have been sold on the market.

However, the output will be kept for captive use when the PX unit of its phase 2 project comes on stream, which means that there will be around 700,000 tonnes/year less supply in the spot MX market.

Among the reformers to come on stream in 2020, only Sinopec Zhongke Refining & Chemical’s facility is not integrated with downstream PX units.

However, its MX capacity is not sufficient to fill the supply gap in the market.

The supply gap is expected to widen further in 2020 because of demand from Hainan Refining & Chemical and Fuhai Chuang, whose PX units were started up in 2019, as well as from Sinochem Quanzhou’s new PX unit.

Demand is expected to remain strong.

However, the intensive start-ups of PX units in 2019 exerted downward pressure on the market and spot prices decreased.

This, combined with increasing MX prices stemming from strong demand, has squeezed PX producers’ margins.

PX producers saw their margins falling in the third quarter of 2019, especially in September. Some of them shut their units in response to high cost pressure.

However, the overall operating rate of the PX market increased sharply in September because of the start-up of Hainan Refining & Chemical’s unit.

PX operating rates decreased in October and November.

The overall operating rate of the PX market remains the most important factor affecting demand for MX in 2020.

MX demand is expected to increase further based on the designed PX capacity but this may change if the new PX capacity cannot be absorbed and PX producers’ margins keep shrinking.

Focus article by Veronica Zhang