Commodities 2021: Global benzene supply set to remain unusually tight into new year

Singapore — The global supply tightness that unusually characterized the benzene market in the second half of 2020 is likely to persist into 2021, although demand for the byproduct chemical of aromatics units, crackers and reformers will hinge on the impact of new downstream plant startups in China.

Aromatics units in Asia are expected to run at reduced rates in H1 2021, estimated at 70%-80% in North Asia, as aromatics margins continue to hover below breakeven levels. Although benzene-naphtha spreads were firm in the fourth quarter of 2020, no increases in run rates were reported, with margin losses on paraxylene too steep to be compensated for by benzene.

"Aromatics producers are relying on benzene margins," one trader said, echoing widely-held sentiment that benzene margins are healthier than those of associated products.

Benzene supply from other avenues is expected to be stable in the new year, with cracker rates seen remaining high to meet Asia's demand for olefins.

Demand presents a more complex picture, with new Chinese styrene supply in 2021 projected at 5.88 million mt/year, almost three times the country's annual import volume of around 2 million mt. This could spell trouble for regular exporters of styrene to Asia, especially those that do longer-haul shipments. Should Asian demand for US styrene dip, the US may require less benzene from Asia.

Benzene exports to the US accounted for around 51,000 mt/month of South Korea's benzene supply over January-November, or 28% of its total benzene exports.

These cargoes will likely move instead on an opportunistic basis in 2021, rather than on the monthly contractual volume basis seen over the past two years, enabling traders to react faster to changes in price spreads, market sources said.

US SUPPLY DEFICIT

A supply deficit was expected to define the US spot benzene market in H1 2021, supporting prices as they continue to recover to pre-pandemic levels.

Market sources said continuing tight benzene supply appears somewhat inevitable due to a range of factors, including low imports from South Korea, typically the US' biggest source of benzene imports, low US production via toluene conversion, and depressed refinery operating rates due to lower gasoline and jet demand.

Even if the South Korea-US arbitrage re-opens, market participants said higher benzene import demand from China was expected to draw barrels from South Korea that might otherwise have gone to the US.

"It's hard to see this market operating at anything but a supply deficit [until imports increase]," one US trader said.

Refinery operating rates are expected to remain reduced while the pandemic continues to depress oil demand in the US and globally, which could very well last through 2021. US refinery utilization rates recovered from an April low of 67.6% to a pandemic-era high of 82% in August, before falling back into the 70s% range in subsequent months, according US Energy Information Administration data.

Limited US benzene production via toluene conversion is also expected to continue into 2021 due to weak margins, sources said.

ROBUST DEMAND FOR SM

The robust demand from downstream styrene monomer producers that characterized the end of 2020 is expected to continue into 2021, market sources said.

While no US producers are expected to shut down or immediately cut rates in response to the additions to global supply coming online in China, potentially weak or unstable production margins would determine operating rates, they said.

China, the world's biggest benzene importer, is expected to see domestic supply tighten further in 2021 as downstream expansions outpace the availability of benzene. Large-scale downstream styrene and phenol units are integrated in China, with supply from these plants net balanced. Therefore, the increase in demand for benzene would come from standalone downstream units, which are scattered along the eastern and northern coasts of China. However, the mainstream ports for breaking bulk continue to be Jiangyin and Changzhou.

Based on current start-up dates, an estimated 3.8 million mt of new demand is expected. However, delays are foreseen given the ongoing pandemic.

Preliminary CFR China term contract discussions for 2021 point to a premium not far from that agreed for 2020 at $5-$9/mt to the weekly Mean of Platts Korea benzene benchmark.

OPPORTUNITY FOR EUROPE

In Europe, rumblings of tightening US benzene stocks in the new year could spell opportunity and lead to increased arbitrage flow out of the continent.

Typically, the arbitrage path out of Europe to the US opens two or three times a year and is highly opportunistic – often with trades concluded before the pricing spread is visible in the market. With reduced benzene flows out of South Korea and a lack of Brazilian exports to the US in late 2020, a deficit may be created for European exporters to fill.

Globally, the watchword for 2021 is "uncertainty" among players in the benzene market, with unpredictable factors blurring a clear view. News of advances in COVID-19 vaccine development has sent positive waves through financial markets and stoked hopes of recovery, but for some downstream benzene commodities, the threat of further lockdowns holds strong influence, while China's continued expansion downstream forces exporters to consider alternatives.