China imports to underpin Asia toluene market in H2 2018

SINGAPORE (ICIS)–Asia’s toluene market direction in the second half of this year will be determined by the buying activity from Chinese importers, which has been the key factor influencing its prices so far in 2018.

FOB (free on board) Korea prices, which have been fluctuating in a wider-than-expected range for the past month, closed at $760-785/tonne in the week ended 1 June for June and July-loading parcels.

The decreases at the close on 1 June marked the end of three weeks’ worth of stable-to-firm price trend.

This followed weaker import demand from China for July, which mainly stemmed from the ending of traders replenishing shore tank inventories at eastern ports such as Jiangsu.

CFR (cost & freight) China prices were in a sideways trend for most parts of early 2018 up to March, at $690-765/tonne.

Prices only picked up after April and hit a peak of $835/tonne CFR China after fluctuating in the $700-710/tonne CFR China range for a few weeks.

Unlike earlier expectations, when market players were hoping for Chinese import demand to peak after the post early-March Lunar New Year period, CFR China buying activity remained muted and only rose after May because of improved demand from the gasoline blenders.

Blending demand received a boost because of lower gasoline production from state-owned refineries, amid a spate of turnarounds in China – mainly in the eastern regions – starting end April to June.

The better blending economics for toluene in early May, particularly for the oil majors, paved the way for demand as well.

Toluene-isomer xylenes spread on an ex-tank basis was wider, with toluene being much more price friendly for gasoline production as compared to isomer xylene.

With the 1 May implementation of a new online tax-filing system for oil and chemical products, oil majors had no choice but to buy blend stocks themselves instead of gasoline cargoes directly as the government was effectively making private gasoline blending activities unworkable as these blenders will not be able to potentially avoid tax payments via the paper filing system now.

The presence of higher-than-expected inventories at east China main ports – stock levels hit a high of 76,700 tonnes in early March – contributed further to the later timing of import demand. Inventories only fell significantly after April. (see chart below)

The only key issue hampering import demand from improving further was the generally weak off taking activities from the downstream chemical sectors as isocynates, benzoic acid, benzyl chloride and other types of solvent products.

The downstream demand was hampered because of low and unchanged operating rates because of stricter environmental regulations imposed by the government since second-half 2017.

Looking ahead, however, the bleak demand situation for toluene from the chemical downstream sector could reverse soon starting August-September because of Wan Hua Chemical’s new TDI plant start-up.

The TDI plants’ nameplate capacity is currently 300,000 tonnes/year, which could equate to around 160,000 tonnes/year of toluene usage, according to several market players.

While this may not directly represent an increase in demand for CFR China import toluene cargoes, it is likely to boost domestic toluene demand within north China particularly Shandong region and allow for potential arbitrage flows within the country.

This in turn may support import parity of yuan-denominated ex-tank prices and allow for healthy distributor margins – if they consider to buy CFR China cargoes, which is a key driver for majority of these import buyers.

Market participants in China were quick to note also that supply increments – following at least three new plant start-ups this year – will outpace demand increments, which could pose a problem in determining which will have a larger impact on import demand and prices.

“The additional capacities may not be sold into the merchant market because there will still be captive usage, since these producers are refineries with gasoline requirements and fulfilments,” one east China-based trader said.

Ultimately, it will be dependent on how the internal consumption for gasoline – of these new start-ups – will pan out leading up to the year-end.

Changes in average operating rates of state-owned refineries, due to turnarounds or outages, will be another direction driver.

Aside from China demand-supply fundamentals, the other key price driver is the supply balance within Asia.

Supply has been generally long between January and May, owing to the stable operating plant rates and overall sufficient availability in southeast Asia, a key net exporter within the region.

Availability of northeast Asian cargoes was curtailed at some points in time – particularly in February and March – because of turnarounds.

However, supply has been steadily rising for cargoes loading in May and June – with the market seeing an additional of close to 30,000 tonnes of product from South Korea alone – as some downstream plants had ongoing shutdown plans all the way till early July (see above).

All of these cargoes, as expected, are heading to China because of the opened arbitrage window for exports during the same time period.

The increment in excess spot supply from South Korea – going forward – will be driven by downstream spreads for TDP operators, since the benzene-toluene spreads have been narrowing consistently from March, when the spreads hit a peak.

The healthy spreads between toluene and xylenes (para and isomer) have been the only saving grace for the TDP market.

“Benzene demand-supply fundamentals are likely to continue remaining weak, with increments in supply still expected from Middle East and Vietnam from June, so that is going to still put pressure on TDP operators whether to run their unit with more toluene or less toluene [since they can adjust the amount of feedstock],” one northeast Asian end-user said.

“Benzene demand-supply fundamentals are likely to continue remaining weak, with increments in supply still expected from Middle East and Vietnam from June, so that is going to still put pressure on TDP operators whether to run their unit with more toluene or less toluene [since they can adjust the amount of feedstock],” one northeast Asian end-user said.

There is also hope that supply will be curbed again in the autumn season – when several plants start their planned maintenances – to provide a temporary relief to the readily sufficient spot availability.

Ultimately, if China’s importing activity continues to be robust, there will be no issues with them soaking up the excess supplies at any point of time.

“The key issue is how much these buyers can procure and how long their buying activities can last, but so far it has been very sporadic and capped to short time frames because of them being risk averse,” one southeast Asian trader said.

Focus article by Trixie Yap
Interactives by Nurluqman Suratman

Picture: Imaginechina/REX/Shutterstock