Singapore — Northeast Asian supply of orthoxylene is expected to lengthen in second half 2019 due to lower demand from a bearish outlook for its downstream plasticizers industry, as well as increased domestic supply in both China and South Korea.
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China, the largest importer of OX in Northeast Asia, imported only 48,332 mt over January-May, down 71.3% from the same time period last year. It also exported 8,003 mt of OX over the five-month period, compared with none a year earlier.
So, while China remains a net importer of OX, its reliance on imports has fallen drastically.
This is due mainly to related Asian paraxylene production margins plummeting since the startup of Hengli Petrochemical's integrated refinery complex at end March, which has two PX lines each with a nameplate capacity of 2.25 million mt/year. The Asian PX-naphtha spread narrowed to its lowest level since Q4 2017 in May, with the spread between benchmarks CFR Taiwan/China PX and CFR Japan naphtha physical sinking to $304.08/mt on May 15, a few dollars shy of the previous low of $297.875/mt on November 10, 2017.
While producers had been prioritizing PX production over OX prior to Q1 due to unusually strong margins for PX production, this came to a grinding halt in April, resulting in a higher percentage of OX being produced from aromatics units.
Chinese OX supply saw a further increase from the startup of Fuhaichuang's No. 2 aromatics unit on March 18, which has a nameplate capacity of 240,000 mt/year of OX. All of Fuhaichuang's OX production will have to be offered in the open market as it does not operate any downstream phthalic anhydride plants.
Due to the length in domestic OX cargoes, state-owned China Petroleum and Chemical Corp., or Sinopec has repeatedly lowered its domestic prices since Hengli's startup. With domestic prices lower than international prices, it is economical for China to export OX to Southeast Asia and Europe, and this will likely persist into H2.
In the short term, some Chinese OX import demand will return after planned maintenance at Fuhaichuang that started June 20 and was expected to last 30-45 days. No OX shipments to Zhangjiagang from Fuhaichuang's Gulei port have been reported since May 29, when 3,000 mt was discharged. This, coupled with lower-than-usual East China commercial inventory of around 16,000 mt at Zhangjiagang, means some PA makers could enter the market seeking additional OX spot imports for July.
LOWER PA OUTPUT BOOSTS OX EXPORTS
In South Korea, OX production was heard to have increased since May, with major producers Lotte Chemical and LG Chem both looking to export one to two additional spot volumes each month for H2. In particular, LG Chem will have more OX cargoes to export after reducing run rates at its 60,000 mt/year PA plant in Yeosu coinciding with the shutdown of its 90,000 mt/year dioctyl phthalate plant at Naju.
The DOP plant was shut April 11 and was reported to have resumed operations in early June. However, the long-term future of the plant remains uncertain, as industry sources said the company may harbor plans to permanently shut the plant in H2 due to poor plasticizer margins and increasing competition from other DOP makers in Northeast Asia.
"Around 55,000 mt/year of PA from the company's Yeosu plant is used for captive DOP production. If PA production rates at Yeosu are cut due to permanent closure of the DOP plant, the company will need less feedstock orthoxylene for H2 and we could see an increase in Korean exports of OX," a buyer in South Korea said.
South Korea's OX exports will likely head to Southeast Asia, Taiwan and Europe instead of China in H2, taking advantage of the open arbitrage into these markets and avoiding the chronic supply overhang in East China.
However, with the tightness in Europe expected to ease in Q3 and major Asian OX suppliers Formosa Chemicals and Fibre Corp in Taiwan, Reliance Industries in India and PTT Global Chemical in Thailand having returned or due to return after maintenance, there will be fewer outlets in H2.
A tight OX market in Europe in H1 caused by production issues and exacerbated by a lack of Russian material flowing into the region prompted European traders to look to the US Gulf and Asia for cargoes, which drove up OX prices globally. However, they found themselves competing for only a small pool of cargoes.
South Korean OX sellers were becoming more cautious about sending parcels to Europe by end June, while sellers in the US were concerned about a fall in spot price and any potential movement of Russian OX into Europe.
While global market prices may not completely re-equilibrate in H2, Europe looks set to become more balanced for OX and less reliant on imports. Slower demand in the PA market over summer has helped ease demand pressure on OX and sources now expect European production to return fully to the market in September.
Where we may potentially see some tightness in supply is from a lack of Russian imports. High domestic Russian prices resulted in its imports falling sharply to 6,111 mt over January-April from 18,918 mt in the same period a year earlier, according to Eurostat data. Market sources said imports were not expected to pick up in H2.
Despite this, the supply-demand balance should be manageable in Europe, unless production issues arise again, market sources said.
Elsewhere, tightness in the US OX market has been exacerbated by strong increases in prices for feedstock mixed xylenes, which have risen 21% since February 1 to 267 cents/gal ($809.01/mt) FOB USG as of June 28. At this price, based on production costs estimated at $150/mt on top of spot mixed xylene assessments, it is no longer viable to export US Gulf OX to Europe, with prices in the two regions around parity and freight costs at $52/mt for 5,000 mt at end June.
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