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Northwest European mixed xylenes arbitrage to US open on paper, risks prevent physical trade

London — The mixed xylenes arbitrage window from Northwest Europe to the US Gulf is widening again on paper but the risks and logistical challenges of physically moving material has prevented traders taking advantage, market sources said this week.

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The gross profit calculated for moving MX from Europe to the US Gulf was $69.24/mt, based on a 5,000 mt cargo, Monday.

The window has been widening since October 3 as weak NWE gasoline brings outright MX prices down, while tight supply in the US market supports prices there.

However, no material was heard moving yet. "There is a slight arb opportunity but it's difficult to work in a falling market," a trader said.

Strong demand from downstream paraxylene due to attractive margins are limiting export demand. "Most paraxylene production in Europe is captive," a producer source said, so there is little incentive to sell MX instead of turning it into more profitable and marketable PX at the moment. In addition, logistical and quality issues increase costs to squeeze net profit margins and reduce participants' appetite.

"MX from Europe does not meet US quality, so depending on the quality you need [to give] at least a 5 cent/gal [$15.21/mt] discount," a European trader said.

"Unless you have your own tank, it usually costs around 3 cents/gal to convert from DDP to FOB, if someone has the tank capacity and is willing to help," the trader added. This is because you need to unload cargo from a barge into a storage tank in the ARA region before reloading onto a vessel to transport to the US. This also increases your demurrage risk at loading ports as well as at discharge if there are any delays.

Tight supply in Europe was also a concern as there is "not normally 5,000 mt available in Europe," a trader added, so traders work on a 1,000 mt basis. This increases freight costs from $34.50/mt to $50/mt to the US Gulf, one trader said, as well as reducing overall potential profits due to a smaller quantity.

"You have financing costs and insurance. And you still need to make a margin otherwise what's the point," the trader added.

With these discounts applied, the margin shrinks, but still looks profitable on paper at $28.495/mt to the US Gulf.

However, this does not take into account financing and insurance costs, which, one trader has said, over a 90-day period can increase costs considerable. There is also the issue that "US buyers hold the upper hand as they can low-ball on bids for inferior quality, knowing European sellers will find it hard to place material [in the US]," a source said. Thus, a trader said they look for "around $75/mt" gross profit margin before the arbitrage window truly opens. Since the beginning of 2018, the margin has only been over $75/mt for 11 days.

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

--Edited by Maurice Geller, maurice.geller@spglobal.com