Feature: Mixed xylenes fate tied to gasoline demand recovery in H2

New York — Global mixed xylene prices are expected to see continued pressure in the second half of 2020 amid expected weakness in the downstream paraxylene segment.

The xylenes chain has struggled amid protracted supply length in the US and Asia, and this has been further exacerbated by demand loss caused by the coronavirus pandemic .

Support for the mixed xylenes segment in H2 2020 is expected to come from supply constraints associated with lower refinery utilization rates and as countries move away from lockdown measures leading to increased aromatics demand as gasoline blending component.

PX GLUT THREATENS MX DEMAND

In China, new PX capacity of at least 1.8 million mt/year is expected to start up this year. These new units, Sinochem Quanzhou and shandong Dongying, are likely to consume their MX captively going forward, instead of selling it in the domestic market. However, additional PX capacity may exacerbate the glut in the PX market and further deteriorate production margins.

It remains to be seen if new purified terephthalic acid plants slated to start up in the second half of the year in China can lend some support to paraxylene prices and margins.

A 1.8 million mt/year reforming unit at Sinopec's Zhongke refinery in Guangdong, is expected to start up in the third quarter, adding around 400,000-500,000 mt/year of new MX capacity in China.

In the US, demand from paraxylene is also expected to remain subdued for much of the year on the back of global length, as well as on imports. However in Europe, lower output rates in refineries has instead kept the mixed xylene market balanced to tight despite the coronavirus-led reduction in demand.

Overall, the factors that drive the xylenes market will likely be tied heavily to the recovery of the global economy. Demand from the downstream PET segment, but also gasoline octane demand, will be heavily influenced by the economic security and spending habits of individuals.

"Most likely when we all come out of lockdown, the demand will come into the market with the limited production capacity availability," a European trader said in early May, referencing recent refinery run cuts in the region.

"People, who were not allowed to consume for two months, will come [to the market] and consume," the trader added. "This will create a peak that will be met with a very limited capacity."

INCREASED AROMATICS INTO GASOLINE BLENDING AFTER LIFTING OF LOCKDOWNS

The fate of European mixed xylenes will also be reliant on the transition of countries away from lockdown measures and subsequent pick up in gasoline blending activity. Weak conversion margins since the start of the year, has already shifted the dependence of the MX market to the gasoline blending segment, with market participants now looking to inventories in the region for sign of additional demand.

With the growing levels of gasoline inventories in the Amsterdam-Rotterdam-Antwerp hub in May, it will likely take time to deplete the exciting gasoline before the demand for blending components will kick in at the full extent.

Mixed xylenes traders in the US will also be looking to gasoline for pricing support. Refiners began to cut rates in Q1 as gasoline inventories swollen to near record-levels and rates fell to as low as 67.7% in mid-April. Those rate reductions helped to lend support to mixed xylenes prices and that trend is expected to continue into the second half of the year. While such a move would bolster pricing, it could also keep the prompt spot PX-MX spread and result in poor economics for paraxylene producers running crystallization units.

Another drawback to potential higher pricing due to refinery cuts is a negative impact on arbitrage economics. Though mixed xylenes exports out of the US are not as significant as some other petrochemicals, their importance increases once demand becomes confined sole to the gasoline blending segment.

Finally, low crude oil prices may support China's appetite for isomer-MX imports into gasoline blending, similar to the trend seen in the first half of the year when China saw strong demand for MX imports, market sources said in early May.

"If this low crude oil price continues until end of this year, MX demand from China will keep strong as gasoline blending value will be high," a Northeast Asian end-user predicted. "But if crude price returns to over $40-$50/b, the supply of MX will be more than demand and MX will be weak."

With the coronavirus pandemic still wreaking havoc on global markets, crude oil prices could remain low in 2020, he added.