S Korea aromatics output to take hits as refiners eye Oct run-rate cuts

Author: Nurluqman Suratman

2020/09/18

SINGAPORE (ICIS)--South Korea's production of aromatics may be affected as domestic refineries mull cutting run rates further in October on poor margins amid sluggish demand.

Most refineries in the country have been operating at reduced rates since the second quarter of 2020 as international oil prices slumped, while demand for middle distillates was depressed by coronavirus-related lockdowns.

A further reduction of 5-10 percentage points in refinery run rates is planned for October, which will see South Korea’s crude distillation units (CDUs) operating at around 70-90% of capacity, market sources said.

Poor margins and heavy inventory losses will likely force producers to cut output at downstream units, especially those in the aromatics chain.

South Korea is a major exporter of paraxylene (PX), benzene and styrene monomer (SM).

PX units in the country have been running at below full capacity due to reduced run rates at upstream refiners.

"Lower operating rates at South Korea refineries will improve the market sentiment in the short run," as supply tightens amid poor demand, ICIS analyst Jimmy Zhang said.

"However, Asia PX supply and demand fundamentals will be still weak in the longer term due to the rapid expansions in China PX industries, he said.

Considering the severity of PX oversupply in Asia, it will be hard for South Korean producers to recoup losses despite reduced production, Zhang said.

Chinese producers Dongying Weilian and Sinochem Quanzhou are expected start up their PX units in September and October, respectively, while Zhejiang Petrochemical is also expected to bring on stream huge PX capacity in mid-2021.

For benzene, the reduction of refinery run rates in South Korea will lead to lower output of the material but overall supply in Asia will remain ample, said ICIS senior analyst Jenny Yi.

“China's benzene inventory is still at a record high, and four new plants in China will be put into operation [from] September, leading to the elevated supply pressure in the fourth quarter in Asia market,” she said.

For mixed xylenes (MX), however, a further cut in South Korean output would lead to a much tighter availability of spot cargoes in Asia.

A snug supply in September drove up isomer-grade MX prices to their six-month highs.

In the styrene monomer (SM) market, some South Korean producers are mulling lowering their rates alongside cuts at upstream production units to stem losses.

SM margins have been in the negative territory since June, according to ICIS data.

Because of diminishing margins to produce aromatics, a South Korean end-user is hesitating to procure full-range naphtha for October delivery.

Favourable margins for olefins, on the other hand, are likely to sustain buying of lighter paraffinic grades of the petrochemical feedstock.

Reduced refinery output, along with market expectations of reduced Western arbitrage flows to the east may well curtail supply as a whole, supporting Asia naphtha’s crack spread – a measure of its refining margin.

Asia naphtha’s crack spread closed on 16 September at $86.30/tonne, stronger than the $60.88/tonne registered a month earlier.

Focus article by Nurluqman Suratman

Additional reporting by Melanie Wee, Samuel Wong, Keven Zhang and Trixie Yap

Visit the ICIS Coronavirus topic page for analysis of the impact on chemical markets and links to latest news.