Market outlook: TDP replaces imports to drive China toluene

 Chinese import demand is likely to take a backseat in being the key driver for Asia toluene prices, as downstream toluene disproportionation (TDP) margins stay positive and continue to have a heavier impact on the market amid the wider than expected benzene-toluene spread.

This is against a backdrop of lengthening supply in several regions in China such as Shandong and south China, with at least two planned aromatics plant start ups in the works.

China’s 2017 imports of toluene at around 331,000 tonnes between January and July have been the lowest for the past three years. These volumes compare with imports of 419,000 tonnes for the same time period in 2016 and 406,000 tonnes in 2015.

Suppliers of toluene cargoes to China have been plagued by weaker than expected domestic demand from the major chemical downstream sectors such as benzoic acid, toluene diisocycanate (TDI), benzyl chloride and trinitrotoluene. Local demand is unlikely to be boosted by any large new plant start ups or new consumption from end users, according to key market participants. There is only one benzyl alcohol plant expected to start at the end of the third quarter. That is in Hubei province and traders believe that its nameplate capacity – less than 100,000 tonnes/year – is unlikely to have a significant positive impact on demand.

Figures from Chinese customs show that import levels were only higher than 60,000 tonnes in February, May and June, with February being the only month when the key driving factor for higher volumes was post Lunar New Year restocking activity.

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Government is cracking down on transport of hazardous materials

The increase in import volumes to China for May and June was considered to be a mix of several factors. These included the fact that some southeast Asia origin cargo sellers needed to redirect their cargoes to China because of weak demand and poorer netbacks in India, and persistently longer supply from several producers because of the usage of heavier feed.

August and September import volumes are expected to be 30,000-40,000 tonnes, with major traders expecting 50,000 tonnes at best because of the lacklustre domestic demand and squeezed margins for import distributors to take trading positions anyway.

Market players had to deal with even more disappointment after demand for toluene from the second key market – gasoline blending – continued to be non-existent even in the lead-up to the Golden Week holiday in the first week of October.

A key factor for the weak blending demand is the oversupply of gasoline in the domestic market amid limited export quotas and high run rates for teapot and state-owned refineries. This situation is likely to extend into the last quarter of 2017 – pending the issuance of export quotas by the government at the end of September.

TRANSPORT CONTROLS CUT DEMAND

Furthermore, demand from this sector has been – and will be – heavily affected and weighed down by the limited customer base and stricter government controls on the usage and transportation of hazardous material in the market.

Most private blenders – which make up close to 30% of the gasoline trading market – are technically not allowed to buy toluene, in this case because of the operational and licence requirements, which they do not have. While the Chinese situation continues to paint a bleak outlook for the market, the performance of downstream TDP units remains stellar. Spreads for benzene production have remained above the average breakeven level for most producers since the last quarter of 2016 (see graph).

Consumption has been persistently strong from TDP end-users, as the import figures for two key regions – South Korea and Taiwan –with highest downstream capacities show (see graphs). Styrene margins have been healthy and China’s benzene demand was strong in the first half with low public shore tank inventory levels.

Imports to South Korea totalled around 448,000 tonnes from January to July in 2017, in comparison to 315,200 tonnes in the same period a year ago. By contrast, exports fell significantly – by more than 50% to 176,000 tonnes in the first seven months from 350,500 tonnes in the same period in 2016. Overall, the country switched back to being a net importer – a situation prevalent so far only in 2015.

Other than during shutdown periods, TDP units in these two key countries have mostly been running at more than 85% of nameplate capacity. This, in turn, has been accounting for an average of more than 20,000 tonnes of spot demand on a monthly basis.

The strong performance and rosy outlook for this sector is likely to continue into the final quarter of the year, putting more weight on toluene price movements than Chinese import demand, because of relatively positive margins. This is despite the understanding among market players that one major plant is due for a 20-day turnaround in November.

Meanwhile, on the supply front, major changes are not likely outside the China market. This, in turn, means that demand is likely to be the key market driver leading up to the first quarter of 2018.