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H2 Outlook: Mixed xylenes under pressure, but new plants offer hope

Global mixed xylene markets face the threat of falling downstream paraxylene prices and margins as they enter the second half of 2019.

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ASIA

New Chinese PX plants are starting up and adding length to the crucial Asian PX market. These plants also bring hope for increased MX demand as they will need to source MX externally. One key new plant is Sinopec Hainan's No. 2 PX plant, which is expected to start in the third quarter. Sinopec is expected to import around 20,000 mt/month of isomer-grade MX after the new plant comes into production, S&P Global Platts reported in May. The Sinopec No. 1 PX line currently produces 600,000 mt/year, but the company expects to raise production to 1 million mt/year by the third quarter, Platts reported.

PX run rates may be cut due to lower production margins. "There are new PX plants based on MX, which will consume more MX, but existing PX plants may reduce operating ratio," a Northeast Asian PX producer said in July. "New PX plants versus lower operating rates will make MX balanced in H2."

So far this year, Asian MX prices have bucked the falling trend in PX, rising $100 from $620/mt FOB Korea January 2 to $720/mt July 16, Platts data showed. Over the same period, Asian PX fell $69.50 to $858.83/mt CFR Taiwan/China, as China's Hengli Petrochemical started its new 2.25 million mt/year PX plant in March. The PX-MX spread hit a year-to-date high of $466.67/mt March 12, but has since fallen to $138.83/mt July 16.

South Korea's S-Oil is expected to drastically reduce its MX sales quantity in August, market sources said. Over the last few months, S-Oil has supplied about 50,000-60,000 mt/month of MX.

S-Oil expects to restart its 1.1 million mt/year No. 2 PX unit at Onsan in August. The unit was shut in March for longer-than-usual maintenance.

A Northeast Asian trader had an optimistic outlook on the MX market in the second half of the year, targeting a spread between MX and naphtha at close to $200/mt over the coming period. From January through mid-July, the spread averaged about $160/mt.

AMERICAS

US mixed xylene prices are expected to face continued pressure during the latter half of 2019, driven by a subdued downstream paraxylene market and reduced export demand. Stronger blend values are expected to support US mixed xylene prices through the first part of Q3. Mixed xylene's blend value was as high as 273.37 cents/gal during early July, Platts data showed. This can be attributed to a wider regrade, the spread between regular and premium gasolines, which was seen as high as 24.50 cents/gal. Sources expect this trend to continue through July but taper off in August as seasonal demand for gasoline in the US falls.

US spot paraxylene prices began to drop in the second quarter of this year and have remained low headed into H2. To put it into perspective, the US prompt spot MX-PX spread flipped into negative territory in late June and fell as low as minus $51/mt, Platts data showed. Using an average June spot MX price, the spread was barely positive and hovered under $20/mt to start July. At these levels, crystallization units were unprofitable, curbing demand for mixed xylenes.

Participants said that lower demand was partially offset by limited output from toluene conversion units as toluene disproportionation margins hovered in negative territory for much of the first half of the year. Margins could improve during the latter part of the year as demand for toluene from the gasoline segment drops and prices fall, though this would still depend on stronger benzene and mixed xylene pricing.

Seasonal demand in the downstream PET market is another factor expected to impact mixed xylene prices. Typically, PET demand in the US is stronger in summer months, and sources said that demand was likely to fall in late third quarter and into fourth quarter. This would negatively impact the upstream paraxylene market and subsequently mixed xylenes. A similar dynamic is expected in the orthoxylene market as PA demand falls in line with colder weather. Looking further out, the start-up of the Corpus Christi Polymers PET and PTA plants are likely to support the xylenes chain.

Looking forward, US mixed xylene prices are expected to face pressure but could still see some upside, sources said. Participants pointed to poor extraction economics and said that some support from octane demand would likely result from the closure of the Philadelphia Energy Solutions refinery in the Northeastern part of the country and the pending implementation of IMO 2020 regulations.

EUROPE

Any rise in mixed xylene demand in Europe in H2 2019 will rely on increased interest in the downstream paraxylene market and a corresponding increase in the paraxylene spread over mixed xylene. So far this year, chemical demand has been muted, with paraxylene margins over mixed xylene falling into negative territory.

The current situation is slightly better but still does not look optimistic for producers.

As a result, spot market activity has been low with producers limiting excess supply over their contractual volumes.

European markets will continue to see strong demand in H@ from the gasoline blend pool, which has prevented premiums from falling to historic lows. While premiums have fallen considerably since the end of 2018, strength in the gasoline market and high blending values for mixed xylene have kept some demand in the market. The driving force behind gasoline blending demand for mixed xylene will be shipments to the US. US demand is expected to increase following the fire at Philadelphia Energy Solutions refinery and the subsequent news that they plan to permanently close the fire-damaged 335,000 b/d refinery, which is likely to strip 153,980 b/d of gasoline production from the market.

With its high octane value and the fact that MTBE cannot be used for blending in the US, European markets are expected to see continued demand for mixed xylene-blended gasoline in the US.

-- Kevin Allen, kevin.allen@spglobal.com

-- Benjamin Brooks, benjamin.brooks@spglobal.com

-- Gustav Inge Holmvik, gustav.holmvik@spglobal.com

-- Edited by Zac Aiuppa, newsdesk@spglobal.com