EPCA ’20: Europe benzene length keeps spreads to naphtha unprofitably low

LONDON (ICIS)–European benzene prices suffered major blows during the peak of the coronavirus pandemic outbreak, and despite gradual gains since early April, have yet to return to February levels.

With the approach of the European Petrochemicals Association (EPCA), we take stock of how the market has performed this year, and what is expected in the coming months.

This year, the EPCA annual conference – the key networking event for the region’s petrochemicals industry – has been forced to adopt a virtual format.

March saw some of the most remarkable price moves in the market’s history, because of collapsing demand and rapidly decreasing oil prices which plunged to 18-year lows.

Benzene-crude prices

Automotive factory closures and persistently weaker dynamics in the styrene sector hit benzene demand.

One Wednesday in March, benzene bids recorded – at the time – was the sharpest ever daily decrease, falling by $153/tonne. That followed sharp decreases the week prior  on “Black Monday” when European chemical stock prices plummeted amid wider market unrest.

Benzene spot prices 24 Feb-24 March 2020

Less than a week later, benzene prices halved in under 24 hours.

The April contract then followed with a 70% drop, to register the lowest price since ICIS records began in 2002.

Benzene contract prices

Fast-forward to the present day and prices have recovered slightly. An upward trajectory was seen until July, after which prices have fluctuated.

Benzene spot to dateBENZENE-NAPHTHA THINLY SPREAD
The spread to naphtha has been under severe pressure since the end of March, and remains gravely unprofitable.

Benzene-naphtha spread: benzene and naphtha spot prices

The spread between the two products provides a gauge to the profitability of benzene production – a wide spread suggests healthy margins for producers and a narrow spread indicates compressed margins.

The spread was over $330/tonne in January, but is now mostly struggling to exceed $40/tonne.

A healthy spread to naphtha is considered to be around $200/tonne. A benzene-naphtha spread below $150/tonne makes benzene production uneconomical.

Just as remarkable has been the length of time that the spread has been unprofitable. It has been at less than $100/tonne since the start of May. In June, there was a mere $16/tonne between the two products.

Strong paraxylene (PX) margins supported weak benzene economics last year, but that is not the case this year, with PX margins also weak.

Although demand is recovering, it is not strong enough to push benzene back into profitable territory.

Consumer confidence has been dampened by fears of a second wave of infections and another reinstatement of lockdowns which will weaken the economy again and result in further job losses.

Globally, the market remains long. There is talk that some players in Asia might idle smaller aromatics units because reducing rates further will be difficult and have had little effect so far in improving profitability.

Styrene consumption accounts for around 50% of benzene output.

Trinseo is reviewing its 300,000 tonne/year styrene operation in Bohlen, Germany; a final decision is expected soon.

Demand from most derivative sectors – apart from automotive – continues to recover, but remains below pre-coronavirus levels.

Planned downstream maintenance will reduce demand until the end of November; demand is projected to drop during the winter in line with reduced activity in key sectors, such as construction.

In addition, US-China relations remain volatile in the run up to the US election. The lack of visibility and profound uncertainty make for a rather unpredictable outlook.

END-USE SECTOR OUTLOOK

AUTOMOTIVE
Long-term investments for tightening emission standards, the growing push to electrify vehicles and shared car ownership have left firms cash strapped.

The pandemic, lockdowns, supply chain disruptions and associated sales cuts have slashed profitability and this could lead to further rationalisation or strategic partnerships.

Demand continues to improve from April’s all-time low. However, reaching pre-pandemic levels is still a long way off against a background of chronic overcapacity and high costs.

A complex supply chain, difficulties in social distancing in plants and customers staying at home will continue to impact the sector.

CONSTRUCTION
Most countries are expected to register a contraction of construction activity in Q3 as social distancing restrictions affect building activity. The worst affected countries in Q3 included Argentina, Malaysia, India, Brazil, Russia and the UK, which all a registered double-digit negative contraction.

Activity is not expected to return to pre-pandemic levels until Q3 2021. In the west, the lingering effects of the pandemic will be felt even when restrictions are lifted. This includes transport and logistic bottlenecks, staffing issues and weaker demand.

Benzene prices are on a CIF (cost, insurance & freight) ARA (Antwerp-Rotterdam-Amsterdam) basis.

The EPCA virtual annual meeting runs on 5-7 October.

Benzene is used to produce a number of intermediates that are used to create polymers, solvents and detergents.

Additional reporting by Rob Peacock, Moritz Lank, Rhian O’Connor and Jincy Varghese.

Focus article by Helena Strathearn

Thumbnail picture: Construction, a key end market for benzene, is not expected to recover to pre-pandemic levels until late 2021. Picture source: Source: Mak Remissa/EPA-EFE/Shutterstock.