OUTLOOK '18: Asia toluene pinned on Chinese demand, TDP run rates in Q1

08 January 2018 11:25 Source:ICIS News

SINGAPORE (ICIS)--Asia’s toluene prices in the early part of 2018 will be heavily pinned on China’s import appetite during the Lunar New Year holiday period as well as downstream plant run rates in northeast Asia.

Buying appetite from China has been showing signs of improvement since end-December 2017, with importers starting to commit to January-loading parcels to stock up before the Lunar New Year holiday starts in mid-February 2018.

The limited amount of stockpiles at east China’s public shore tanks, which hit a close to historical one-year low at 48,700 tonnes on 14 December, also boosted purchases of CFR (cost & freight) China toluene. (please see interactive below)

Furthermore, with the import buying power strengthening since the first week of January – amid a stronger yuan against the US dollar – there was more push for more CFR China buying activity.

China is facing a domestic supply shortage in its eastern and southern regions, with several ongoing plant shutdowns (please see table below) lasting almost into end-December/early January.

Several traders and end-users in domestic China estimated at least a loss of 10,000 tonnes/month of supply from these turnarounds since end-November.

Company name Location Feedstock TOL capacity (in ‘000 tonnes/year) Shutdown period
CNOOC Taizhou Taizhou, China Reformate 200 End-November 2017 for at 30-40 days
Sinochem Quanzhou Fujian, China Reformate 300 3 December to mid-January
Petrochina Qinzhou Qinzhou, China Reformate 380 18 December to 28 December

“Several small and medium-sized importers have been enquiring for January-loading cargoes at higher-than-expected bids and this is coming as a surprise to us because import demand has been weak even during the Golden Week holiday in China,” one northeast Asian trader said.

CFR China prices, as a result, have been on a general uptrend to reflect this surge in importing interest and overall higher discussion levels for January shipments. Prices rose by more than 4%, comparing 1 November 2017 with 22 December 2017, according to ICIS data.

However, there are still those that believe that prices are potentially overheated since early December and Chinese buying activity is likely to die down soon amid ample domestic supply.

“There is still a steady stream of product from other producers – both new and old – not having turnarounds and it balances out the lack of material from those on turnarounds,” one Chinese trader said.

Supply in domestic China has been rising, with several state-owned refiners adding capacities to their existing sites since the third quarter of 2017. (please see interactive below)

“We need to bear in mind that even with [Sinochem] Quanzhou on turnaround, we still have [CNOOC] Huizhou’s new second phase plant able to cover that shortfall on deliveries to east China, the supply consequences will be dire if all these plants run together,” one south China importer added.

This is in addition to the lack of demand for toluene coming from the gasoline blending sector, as blenders in Shandong or north China seek for other more affordable and convenient blendstocks such as mixed xylenes, MTBE, mixed aromatics and alkylated oil. Such blendstocks are readily available in the Shandong market.

Government regulations on the transportation of toluene in the local ex-tank market, which have been more strictly enforced since 2017, further exacerbated the weak demand from the gasoline market.

The downstream demand was also unchanged from the chemical sectors, of which some plants were still running at lower-than-expected run rates.

Chinese import demand aside, most market participants are also placing their bets on the ongoing burgeoning demand from the downstream TDP units – mainly within South Korea and Taiwan – to lift market sentiment and set the price direction for 2018.

Already, toluene procurement activities from end-users in these two countries have been ongoing for December and January shipments because of the wider-than-expected production spreads for converting toluene into benzene or xylenes.

The benzene-toluene spreads hit around $200/tonne in mid-December – a more than nine-month high – because of wider arbitrage opportunities for Asia-origin benzene exports to the US, overall strong downstream operating rates and later-than-expected plant start-ups in the second half of 2017.

“This situation is likely to mirror the scenario a year ago, where downstream units ran at high levels and [some] idled units were restarted to produce benzene/xylenes as well,” one southeast Asian trader said.

Already, there were talks of a southeast Asian producer considering to restart its idled downstream unit for 2018 because of the better downstream spreads.

Overall, South Korea was a net importer for 2017, importing a total of 671,120 tonnes of toluene from January to November 2017 and exporting 328,750 tonnes. This was a reversal of their net exporter position in 2016, when the toluene-naphtha spreads and better-than-expected Chinese import demand limited downstream demand.

The country is likely to stay a net importer in the first quarter of 2018 as well, since there are planned supply disruptions at a key refiner’s aromatics unit from end-February to end-March amid high downstream TDP/STDP run rates.

Meanwhile, import volumes to the third key importer in northeast Asia, Taiwan, have already surpassed 130,000 tonnes from January to October 2017, up from 107,855 tonnes for the whole of 2016.

One key difference from the market situation in early 2017, however, is the alarming uncertainty in supply fundamentals in northeast Asia because of the slower-paced conclusions of domestic contracts among South Korean producers and end-users.

While several South Korean producers have confirmed their spot availability for end-January or February-loading, there are still concerns among market participants that this may change because there are still some domestic contract allocations unsettled as of early January.

“Price seems to be the key issue among the buyers and sellers, since premiums have been mixed among some producers who have sold export term cargoes, with neither parties willing to give in at the moment,” one northeast Asian producer said.

The discussion levels in domestic South Korea are within the premium range of $4-6/tonne on an FOB Korea basis to FOB Korea quotes.

Overall, pending the potential change in supply availability after confirmation of domestic contracts, most market participants believe that prices could be headed for an uptrend before the Lunar New Year holiday period.

Outlook article by Trixie Yap

By Trixie Yap