The global paraxylene market looking to Asia, especially China, to provide direction is a trend of the past few years that looks set to continue into 2021.
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The Asian market is expected to remain oversupplied into the first half of 2021, extending a particularly tough 2020 for producers. Nevertheless, market participants expect that fundamentals in 2021, particularly in the first quarter, may improve on tighter supply and demand from new PTA capacity, although the market is expected to remain long.
Supply and demand is rebalancing as paraxylene operating rates in the region have fallen due to production margins dropping below breakeven levels for an extended period. However, sources said there was a limit to run rate cuts, despite the weak economic environment, due to gasoline blending demand and refiner needs to secure internal supply of hydrogen to desulfurize upstream products.
Reduced market supply may be insufficient to lessen current length significantly, a South Asian market source said. Only a large turn in the gasoline market, or weaker polyolefins margins, that push refineries into overall run rate reductions would cause a bigger drop in paraxylene production, a trader said.
The conflicting mix of factors make it tough for plants to decide on forward operating rates and term contract volume commitments for the coming year, an Asian producer source said.
Nonetheless, term contract volumes are expected to be larger than in 2020, easing pressure on spot supplies, sources said. Paraxylene term contract negotiators are discussing discounts of $7-$10/mt to the average monthly of Asian Contract Price and the monthly average of spot prices, in contrast to low single-digit discounts for 2020 contracts, with one contract already heard to have settled.
NEW CAPACITY DOWNSTREAM
New purified terephthalic acid demand in China will also help to absorb excess paraxylene supply in Q1 2021, including 2.5 million mt/year from Fujian Baihong, 2.4 million mt/year from Shenghong and 3 million mt/year from Yisheng Ningbo's No. 5 unit. These new capacities represent approximately 5.25 million mt/year of paraxylene demand, according to S&P Global Platts calculations.
However, all eyes are on the startup of Zhejiang Petrochemical Phase 2, which will add a whopping 5 million mt/year of paraxylene supply in late Q1-early Q2, weighing on a market struggling to rebalance, and keeping the supply-demand slate relatively unchanged from 2020. Aramco Jazan's 850,000 mt/year paraxylene plant startup in Q2-Q3 will also add supply.
The positive start to the year due to additional demand may be short-lived and pressure could resurface once Zhejiang Petrochemical Phase 2 starts up, an Asian paraxylene producer said.
Market sources said a longer-term recovery in production margins may be difficult, as there was enough capacity available to ramp up operating rates or restart if production margins rebound.
Market participants are also concerned about the operating rates of downstream PTA plants in China that have kept run rates steady at around 80%-90% of capacity in 2020 due to decent margins. While new PTA capacities would boost paraxylene demand, further Chinese PTA inventory buildup in an already oversupplied market may potentially reduce run rates on squeezed production margins, the sources said.
Factors such as the COVID-19 vaccine rollout and the pace of post-pandemic recovery by end-users add to the demand uncertainty in Asia's paraxylene market.
Meanwhile, European market players are occupied with their own surplus inventories and expect minimal impact from China's new PTA capacities on their market.
Paraxylene market expectations for 2021 are not optimistic since economic recovery from the coronavirus pandemic is the major factor impacting spot prices and market fundamentals.
Market participants typically stock up for the summer season over winter and spring, but COVID-19 could make things different in 2021, a European trader said.
A number of market participants expected the only outlet for European paraxylene will be the US. The early 2021 picture may remain unchanged, as Europe expects an oversupply of paraxylene due to sluggish domestic demand.
Some market players believe that the focus for producers outside China should be on rationalizing production in order to rebalance the market.
US UNDER PRESSURE
Asian capacity growth over 2019-2021 has impacted paraxylene pricing globally, including within North America.
US producers struggled throughout Q3 as economics were negatively impacted by stronger US mixed xylene prices tied to planned and unplanned outages along the US Gulf Coast. The prompt spot PX-MX spread averaged just over $56/mt in Q3, far below levels considered profitable for crystallization and Parex unit operators. US producers saw better margins on contracts, with the average 2020 paraxylene premiums (not inclusive of discounts) $203/mt higher than the 2020 MX monthly spot average.
In addition, output from toluene conversion units has been minimal in 2020, with selective toluene disproportionation or STDP margins frequently in negative territory and economics unlikely to improve in 2021, market sources said.
US producers may continue to compete with low-cost imports into the US Atlantic Coast; US paraxylene imports surged 45% between 2019 and mid-Q4 2020. During Q2 2020, it was cheaper to import into the East Coast than produce in the US Gulf and move material to the East Coast via a Jones Act vessel, sources said.
US paraxylene prices could see some relief in 2021 amid rate cuts and shutdowns in other regions, but the outlook remains poor, making market participants wonder about the fate of BP's US paraxylene production once the company is full absorbed by Ineos.