FEATURE: Toluene road to recovery far from clear in H2 2020

London — Global toluene supply and demand balances are expected to remain under pressure during the latter half of 2020 due to lower operating rates and reduced demand amid the ongoing coronavirus pandemic.

Weaker pricing in benzene and derivative styrene markets, as well as soft paraxylene prices, dented chemical demand for toluene during much of the first half of the year. However, while weaker aromatics pricing is expected to persist in the second half, demand for higher-octane toluene in summer and lower product availability due to refinery run cuts may give some upside to the market.

Blending economics to drive balances

In the US market, Selective Toluene Disproportionation unit margins, which have been in negative territory more often than not over the past 12 months, appear unlikely to improve in the near term. With little demand from toluene conversion units, octane demand will drive pricing despite weaker blend values to finish the first half of the year.

According to sources, demand from the blending segment will be contingent upon the length of time required to burn through higher gasoline inventories and an overall economic recovery. Sources in the US have forecast steady improvement throughout the second half of the year.

With COVID-19 having spread to the US, however, market participants in Asia have mostly written off the summer-driving season and are said to be scouring for other demand centers, notably China.

Gasoline blending activities within Asia, ex-China, are still thinly slated as government lockdowns enforced to curb the spread of COVID-19 has placed barricades to road fuel needs. Previously, market participants ballparked the US summer driving season, which typically starts in May, to be the driving factor that would spur interest in gasoline blending.

Operating rate drops present opportunity

In Europe, expectations surrounding the post-lockdown market response are more optimistic, with some participants hoping to see "an ideal market situation" as renewed demand meets limited production capacity availability.

"Most likely when we all come out of lockdown, the demand will come into the market with the limited production capacity availability," said a trader on May 1, adding:

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

Some European refineries that were unable to postpone necessary shutdowns until later this year are in the middle of the turnarounds, and will not be able to react to booming post-lockdown demand, said market sources.

US toluene prices will also see some support from lower refinery run rates, sources have said. Refinery utilization rates have fallen and reformer rates have been impacted accordingly. Extrapolating lower refinery utilization rates down to the reformer and assuming a total toluene capacity of roughly 4.8 million mt from reformate, a 10% reduction in run rates equates to roughly 40,000 mt/month.

This, coupled with expected strong reformate pricing, is expected to bolster toluene prices during the latter half of the year. Sources noted that this could stifle chemical demand if gains in benzene and paraxylene pricing fail to outpace toluene.

Renewed demand or temporary spike?

Although the European aromatics market witnessed a rally in prices on the back of stronger crude oil prices in May, consensus among market sources remains mixed on how long-lived any additional spike in prices will be.

"We will see a peak; price, profits and conversion margins will go up," said a market source, adding that there is some expectation of increased demand in H2 2020 from consumers after the prolonged stay-at-home period.

According to another source, the price rise will last for no longer than a week, after which the market will see some moderation and downward adjustment.

Signs of renewed strength have been visible in China, with the market soaking up surplus barrels within and beyond Asia. However, despite the recent strength, questions remain on how sustainable the uptick in China's demand could be while the rest of Asia and the world at large continue to grapple with COVID-19.

Meanwhile in India, the other strong foothold for Asian demand, the government has rolled out zoning plans to bring businesses in COVID-19 free areas back to life.

Some importers have already secured toluene cargoes to be brought into the country for early July in expectation that India's demand could progressively recover as the economy reopens.

With the two major Asian import hubs broadly offsetting each other in demand, the global market faces mixed fundamentals for the third and fourth quarters. Add to it the possibility of a global economic recession ahead, and the road to recovery seems far from clear.