INSIGHT: Bullish benzene still plagues global petchems

By Truong Mellor

LONDON (ICIS)–Following a volatile 2012, the global outlook for benzene earlier this year highlighted concerns surrounding availability and pricing with the market facing ongoing structural challenges amid a shifting production landscape.

While prices across all regions have gradually come down so far in 2013, they remain structurally high against the backdrop of the uncertain macroeconomic environment. Many players argue that the high cost of feedstock is undermining any sustainable recovery in benzene demand.

The story of European benzene last year was one of perpetual bullishness on pricing, as the adoption by cracker operators of cheaper feedstocks such as ethane and liquefied petroleum gas (LPG) led to lower yields of pyrolisis gasoline (pygas), the key feedstock for benzene.

Looking ahead, this trend is likely to continue globally as supplies of paraffinic crude grades such as Eagle Ford and Bakken in the US, which yield less aromatics through the refining process, grow.

Additionally, benzene supply in Asia this year is being diverted towards derivative units in China as numerous phenol and bisphenol A (BPA) plants come on stream.

Asia has traditionally been a key exporter to the US.

And with coal-based benzene production output also reduced since the downturn in the Chinese steel industry from 2008, there have been concerns about further price spikes in the US Gulf market following the record highs seen in 2012.

Coal-derived benzene accounts for approximately 20% of Chinese stocks.

Despite this, however, benzene pricing across all regions has continued its steady downward trend.

The US market is currently well supplied and relatively healthy, according to several traders. Availability in the US has been ample throughout 2013 given weak derivatives offtake.

Asian benzene prices have also tracked lower thus far in 2013 and recently plunged to a six-week low.

Lower crude futures, combined with ongoing weak Chinese demand and a closed Asia-to-US arbitrage window have been weighing on pricing, traders in the region said.

This follows the bearishness seen throughout the first quarter of 2013 in Asia, where prices fell below $1,280/tonne FOB (free on board) Korea in March, a sharp decline from December 2012 when spot benzene was approaching $1,500/tonne.

Downstream players in Europe have echoed these sentiments, with the domestic phenol market  particular described by market players as “disappointing”.

Poor demand from the construction industry has also created difficulties for the European styrenics sector, most recently evidenced by the announcement from INEOS that it will stop production of expandable polystyrene (EPS) at its site in Marl, Germany, at the end of 2013.

This follows several recent plant closures in the polystyrene (PS) market across Europe since October 2012, with the twin effects of poor demand and higher feedstock costs creating unsustainable business conditions.

Ideas about why 2013 has seen a reversal of the upward trend of last year are mixed, although many players feel that prohibitively high benzene costs have, since mid 2012, eroded demand in the major derivative markets.

Other sources point to the wider macroeconomic situation and in particular to the way that the Chinese economy has unfolded so far in 2013. Earlier this year, China’s petrochemical markets were expected to grow significantly buoyed by government stimulus of the wider economy.

But, the restructuring of China’s economy and poor manufacturing data, have tempered that growth.

This type of business environment hardly seems conducive to soaring raw material costs, and while European benzene prices have edged down in 2013, they remain historically high even at the lowest point of $1,235/tonne in March this year.

Crucially, the spread between benzene and naphtha has remained structurally high, at one point in 2013 reaching $600/tonne.

With shale oil production set to expand, the dynamics of benzene production are likely to continue on their current path, which will keep the market tight and prone to volatility.

Combined with a largely pessimistic outlook for chemicals demand in the near to mid term, it seems that benzene availability and pricing will continue to plague the downstream.

Unless there is a determined effort from the market to arrange for further extraction capacities, the only path to redressing the global balance of benzene is through demand destruction.

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