Market outlook: China benzene surprises on the upside

08 November 2013 10:01 Source:ICIS Chemical Business

Market conditions this year have turned out to be better than many people have expected, but oversupply concerns are building for 2014

There is always a danger that the staggered timing of capacity additions down any of the petrochemical value chains can create lack of clarity over the real strength of underlying demand.


 Stimulus has kept China running

Copyright: Rex Features

Such is the case right now down the major benzene derivatives chains in China. Lack of actual benzene start-ups during 2013 have occurred as lots of derivatives capacity has been commissioned, particularly in caprolactam and phenol. As a result, the spreads between naphtha and benzene in China have greatly improved when compared with last year.

But the key question is how sustainable this improvement will prove to be, as next year will see the start-up of lot of overseas benzene capacity. China will remain the main market for exports from these new Asia-located facilities.

From January to September this year, the surge in benzene demand has been impressive in China, according to ICIS China data. Demand rose by 10% to around 6.7m tonnes, compared with a 12% increase for the whole of 2012 over 2011.

On paper, it should have been worse for benzene spreads, but benzene start-ups that had been due to take place earlier this year have been pushed-back to the end of 2013 because of technical problems.

At the same time, China has seen a 17-18% rise in demand for benzene from caprolactam producers – thanks to the successful start-up of new local plants manufacturing the nylon intermediate. Several new phenol plants have also provided strong support to benzene.

Styrene profitability has also taken many industry players and observers by surprise.

At the beginning of 2013, traders and producers were pretty much in agreement that the styrene market would be weak. Thus, there was very little appetite to ship overseas cargoes to China.

But, instead, downstream polystyrene (PS), expandable PS (EPS) and acrylonitrile-butadiene-styrene (ABS) demand has been better than many industry players expected.

Styrenics growth has been buoyed by increased economic stimulus in China, following the “mini-economic stimulus package” announced in July, and an improvement in finished-goods export trade to the West, said a Hong Kong-based trader.

But while PS, EPS and ABS producers have made decent profits, the biggest benefit of the unexpected strength in this value chain has been enjoyed by China’s styrene producers, added ICIS China.

The lack of appetite for styrene imports, the better-than-expected downstream demand, and just two styrene start-ups in China during 2013 have combined to drive-up local styrene average operating rates to around 80%. This compares with approximately 70% last year.

Returning to benzene itself, China’s imports have increased to 473,100 tonnes in January to August 2013. This compares with 439,100 tonnes for the whole of 2012.

This underlines the crucial role that China plays in absorbing surplus Asian volumes – and hence the anxiety over 2014. A total of 2.14m tonnes/year of capacity is scheduled to come on stream in Singapore, India and South Korea next year.

At the same time, the worry is that further downstream capacity additions in China needed to absorb these extra volumes might be delayed. The hope, though, is that any oversupply will only be temporary.

Meanwhile, given China’s rapid increase in benzene imports, a debate is also taking place over whether the China CFR, or landed, price for benzene will become as important as the traditional Asian benchmark price: FOB Korea.

Coal-Based Benzene Supply Increases.
China’s emergence as the world’s biggest steel manufacturer has had one crucial side effect: The surge in coal-based benzene capacity. Benzene is extracted from the coke-oven light oil, which is a byproduct of steel production.

During 2009-2010, as China’s economy roared ahead thanks to the huge government stimulus programme introduced in late 2008 to deal with the global financial crisis, there was a rapid increase in steel production.

But oversupply now blights the steel industry. Some 90% of producers are reported to be losing money

The China Iron and Steel Association has said steel demand will likely remain weak for the rest of 2013, after reporting that its members - 86 steel mills - incurred a combined loss of yuan 669m ($110m, €79m) in June.

Nevertheless, thanks to increased government spending on infrastructure from July of this year, steel production has increased, said a Perth-based financial analyst who covers the iron ore sector.

“Government spending on roads, bridges etc has risen as a result of the ‘mini-stimulus package’ that was launched in July,” he added.

And so while refinery-based benzene supply has been tight, the availability of benzene via coke-oven light oil has increased in 2013 over 2012, according to ICIS China market intelligence.

Some benzene derivatives, for specification reasons, can only use refinery-sourced benzene – for example caprolactam. But styrene and adipic acid producers are able to make use of coal-based benzene.

Coal-based benzene, as a result of its more limited applications, is usually priced at around yuan 200/tonne less than refinery-based benzene.

By Cindy Wu, Emma Shen and John Richardson