OUTLOOK ‘14: Europe aromatics face continued volatility, weak demand

24 December 2013 13:00 Source:ICIS News

By Truong Mellor

Europe aromaticsLONDON (ICIS)--Following on from an unpredictable environment this year, the aromatics market is expected to see further volatility in 2014, with the twin pressures of bearish downstream sentiment and upward pressure on BTX (benzene, toluene, xylenes) prices from the continued growth of shale oil and gas production keeping it a tough market to operate in.

At the end of 2012, a year that culminated in record high pricing across the globe, the upward trend on aromatics was expected to continue throughout 2013. This was evidenced by the record high January benzene settlement at $1,529/tonne FOB (free on board) NWE (northwest Europe).

However, European BTX prices have seen an overall decline over the course of the year, which many feel is a combination of high prices killing derivative demand and the continued economic malaise and austerity measures (both public and private) limiting activity in key end use markets.

Despite this, the year was not without some sharp spikes and drops across the aromatics sector. It is also worth highlighting that BTX prices in Europe have been consistently at high levels both historically and structurally.

BTX 2002 - 2013
European benzene prices were in perpetual decline during the first half of the year, with only a short-lived upward swing in April driven by several production problems and low inventories at the time.

Demand from key downstream chains such as styrenics and phenol has remained sluggish throughout 2013, with the wider economic picture limiting construction and automotive offtake. Phenol in particular has been “disastrous”, according to players in that sector.

Crucially, the market has failed to react in ways that players had predicted. The cracker turnaround season from October 2013 onwards did not help support any sustainable price increase on feedstock tightness, as had been expected ahead of the fourth quarter.

However, the second half of the year did see continued highs and lows on European pricing, aided by firmer US market and speculation-driven bullishness following several production outages both in Europe and the US.

Benzene spot prices Europe

Speaking at the 12th ICIS World Aromatics and Derivatives conference earlier this year, Christian Buhse, head of procurement at Bayer MaterialScience, highlighted the fact that while crude oil prices have remained relatively stable for the last two years, benzene has still seen pronounced volatility over the same period.

European toluene numbers have generally followed the same downward trajectory as benzene over the course of 2013, although the volatility has been less pronounced.

Toluene prices Europe 2013

Looking ahead to 2014, some downstream toluene di-isocyanate (TDI) start-ups could keep European availability balanced-to-tight, although some players dispute the impact that any new downstream capacities are likely to have within the next 12 months.

The US market, the key global driver for toluene, will face continued pressure from increased shale production, and this is likely to keep upward pressure on pricing and pull European material.

Increasingly a thinly traded product chain in Europe, the xylenes sector still faces structural tightness and upward price pressure from the growing influence of the shale oil revolution, most notably in the US.

European mixed xylenes (MX) prices saw a sharp drop early in 2013, but since then have generally held steady around the $1,150-1,200/tonne FOB Rotterdam mark even as the year has drawn to a close.

Xylenes Europe 2013

This is despite continued poor demand from the domestic paraxylene (PX) and polyester sectors all year, with the purified terephthalic acid (PTA) market plagued by closures, bankruptcies and the spectre of rationalisation.

“PX in Europe remains very slow,” said one trader. “That has kept any real interest in MX limited, as there is only really any PX activity when the arbitrage window into Asia is open or the spread with MX is healthy.”

With no clear driving force behind them, European MX prices are likely to ebb and flow with the fortunes of the US and Asian markets in 2014. The increasing structural tightness for global BTX production will keep upward pressure on pricing, which will impede any sustainable demand recovery in Europe.

Similarly, the European orthoxylene (OX) market has remained quiet outside of contractual business this year. With an increasingly smaller pool of players in Europe, production has been finely tuned to meet structural demand, and there is rarely additional cargo seen on the spot market.

Likewise, there is very little domestic demand for spot OX, although some players have noted a growing interest in material from markets such as India and Brazil.

There are two factors that could impact on OX pricing in 2014. Firstly, the closure of Arkema’s downstream phthalic anhydride (PA) plant in Chauny, France by March 2014 could see the shortfall in PA being met by imported volumes, although most sources believe the market in Europe is oversupplied at present.

However, a more balanced PA market could help keep a floor on OX pricing in Europe next year, although any longer term structural impact is unlikely to become apparent as early as 2014.

Additionally, there has been growing concern in Asia among OX players about PA producers installing catalysts in their plants to enable them to use naphthalene as an alternate feedstock, amid poor downstream plasticiser demand and upstream production being more focused on co-product paraxylene (PX), which has been more profitable.

However, the PX landscape in Asia is due for a radical change beginning in 2014, with numerous units coming online. There is approximately 9m tonnes of PX capacity scheduled to come onstream within the next five years, and while nameplate capacities are unlikely to be met, this is still expected to have a significant impact on Asian PX pricing and the global supply/demand balance.

European producers have managed to create what one consumer termed “the semblance of balance” throughout 2013 by exporting material abroad, which is evidenced by the Eurostat export figures this year.

Asia should be well supplied with all the new units coming online,” said the consumer, speaking on the sidelines of the 47th annual European Petrochemical Association (EPCA) meeting in October this year. “ European pricing has been too high for buyers,” the consumer explained. “Europe needs more PX/PTA conversion.”

The growth in PX and expanding TDP (toluene disproportionation) capacity will also fuel the Asian benzene market next year and beyond, as TDP converts toluene to benzene and xylenes, while selective toluene disproportionation (STDP) produces a PX-rich stream. 

However, the impact of this on the European benzene dynamic is unclear. One trader speaking on the sidelines of the European Petrochemical Luncheon (EPL) in Brussels, Belgium last week, believed that any surplus benzene would be diverted to the Middle East rather than Europe or even the US, traditionally the export destination for Asian benzene producers.

The trader added that it expects 2014 to be another year of unpredictability and price volatility for benzene and the aromatics complex in general, largely determined by global trade flows and production issues.

“We will see a year made up of moments,” the trader said, “and they will be tough to predict.”

By Truong Mellor