Mixed outlook for European petrochemicals in 2019 as market digests new trade flows

US-China trade tensions were in the spotlight last year across commodity markets, and the petrochemicals sector was by no means untouched.

Antidumping duties introduced by China on the imports of some origins of styrene – used to make packaging and other plastic and synthetic rubber products - altered trade flows significantly. One result has been an increase in trading activity within Europe.

Growing plastics and fibres demand was behind supply tightness in paraxylene and its entire supply chain in another trend that is poised to continue. Meanwhile other products may have to grapple with continued oversupply – including the gasoline additive MTBE and key feedstock benzene.

In a recent webinar, S&P Global Platts analysed the prospects for the European aromatics sector in the first half of 2019, while market participants were polled on the biggest price and fundamentals questions of the moment.

Antidumping measures

In the styrene market, China implemented antidumping duties on the US, Taiwan and South Korea, ranging from 3.8%-55.7%, with the US attracting duties on the higher end of the range. The US is a major producer and exporter to China, and the higher cost of imports from the US led to a surge in costs to the Chinese end user. This caused US styrene demand to plunge and prices fell to be the lowest globally. With limited purchasing options, China prices rose to be the highest globally, with European prices between the US and China. Asia’s increasing importance as a destination for European styrene means the region’s demand will be watched carefully by producers in 2019.

The majority of participants polled during our webinar expected the European styrene market to feel the effect of increased Asian consumption in Q2 this year. Styrene demand from China waned in the lead up to the Lunar New Year holidays. However, this is set to pick up now that the market has returned from holidays. Although Chinese inventory levels were last reported over 200,000mt, supply is still outstripping consumption.

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Fibres and plastics spur growth

Supply tightness was more clearly in evidence in the xylenes chain, due to strong demand for paraxylene (PX) – a key feedstock for polyester fibre and plastic bottles. This strong demand and tightness of supply can most readily be seen by the margin over PX feedstock, naphtha, in the graph below.

The strength seen in the market is particularly apparent from August 2018, where there was a sharp fall in spot prices, driven by sharp falls in crude oil. However, the margin over feedstock naphtha remained, and still remains, at very attractive levels, the likes of which have not been seen for around 6 years.

For the rest of 2019, market participants are expecting margins to remain at these attractive levels for three reasons. First, many believe there will be delays to new capacities due to open in China this year. Secondly, even if these plants do open, there are plans in Asia for significant growth in production of purified terephthalic acid (PTA) - an intermediary between PX and polyester and plastic bottles. Finally, demand for polyester is expected to grow at substantial rates over the next few years, placing even more demand on PX.

Back in Europe, the new Artlant PTA plant in Sines, Portugal, will need to secure feedstock. Webinar participants thought the most likely source would be the Middle East. The region is a logical supplier given that the transport route is well trodden. Thai petchem producer Indorama sends material from the Artlant plant to Egypt – and transport costs are relatively low. More capacity is also coming online in the Middle East, including in Turkey near Socar’s STAR refinery.

MTBE market awaits seasonal shift

In MTBE – a petrochemical product mainly used as a gasoline blendstock – the expectation is that 2019 will bring some “normality” back to a market where seasonal variations typically drive demand and supply.

Gasoline blending is expected to again be the main driver for MTBE demand. The market has been in a quiet season, as blenders expect to sell off their stocks of winter grade gasoline during January and February, to start blending summer grade product. On the supply side, Europe is typically structurally long because of its production capacity, and likely to remain so. Should Europe need volumes, flows could potentially come from Latin America and Arab Gulf. Typically, export destinations are West Africa and Mexico.

The MTBE price trend usually moves according to seasonality requirements. As the graph above shows, MTBE prices dived in September due to declining demand in line with the gasoline specification change from summer to winter grade, and this is expected to be the case in 2019 again. Between February and March refineries and blenders typically start blending summer grade gasoline, which is higher-octane. MTBE is a preferred component because of its high octane stock and suitable volatility.

Unusually, the MTBE factor, which reflects the relationship between MTBE and gasoline prices, also moved up towards the end of the year 2018. A higher factor typically reflects stronger demand for MTBE, however, the uptick was instead a result of heavy logistical constrains caused by the historically low Rhine water level, and is not expected to persist in 2019.

Most market participants polled about European MTBE said they thought the current length would only partially be corrected between March and April 2019, when gasoline specifications switch from winter to summer grade. That view was based on expectations of rising demand but a lack of export opportunities.

Benzene prices depressed

Unlike in MTBE, benzene prices are expected to remain weak in 2019, continuing from steep falls in the last quarter of 2018. Benzene is used to make a wide range of industrial and consumer products from plastics and resins to drugs and pesticides.

Benzene is suffering from oversupply that has depressed markets globally. In Europe, the situation is more likely to see short-term swings, but the first half of 2019 is likely to see little change the global supply side. Market players are looking to upstream steam cracker turnarounds beginning in earnest in April that could limit the amount of new material hitting the market.

Benzene typically comes out of steam crackers, and while steam cracker maintenances may reduce production output of benzene in Europe, imports are expected to increase and will limit change to the oversupply equation. In 2018, total imports increased by 7-8% to approximately 900,000 mt. A key factor in this increase was higher levels of exports from Indian producers. These volumes are expected to continue growing in 2019, targeting both Asia and Europe. Indian producers have also said that changes in the pricing balance between Europe and Asia are unlikely to cause swings in export focus.

The majority of participants in our webinar believed the benzene oversupply is here to stay in 2019, a clear cut response in line with indications in the wider market. Lessened supply from steam cracker maintenances will be offset downstream, as several styrene production plants have outlined turnaround plans for the year. A continuing low crude environment is encouraging greater cracking, while weak naphtha demand from the gasoline blend pool has seen more light naphtha grades heading into the petrochemical market.

Supply pressure will also continue to be felt globally from benzene production through toluene disproportionation. This process converts toluene to paraxylene, with benzene emerging as a by-product. Downstream demand globally is booming, particularly in Asia, driving strong interest in PX that seems unlikely to fade in the near term.

Reporting by Baoying Ng, Ben Brooks, Simon Price, Stergios Zacharakis and Olu Shaw