Following a bumper H1 for European benzene producers, Thordur Gunnarsson, senior petrochemicals pricing specialist, looks at how robust downstream demand and a balanced-to-tight NWE market could see strong benzene margins sustained throughout Q3 and possibly Q4 2017. Bullish benzene could boost toluene prices during the same period by potentially providing support if TDI feedstock demand in Europe fails to materialize as expected.
NWE benzene, toluene H2 outlook bullish on firm demand, tight supply
By Thordur Gunnarsson
Welcome to The Snapshot – our series which examines the forces shaping and driving global commodities markets today.
So far, 2017 has been a strong year for petrochemical producers. Benzene is among the star performers, but its margins relative to its feedstock naphtha have hovered at consistently high levels since the beginning of the year.
Going forward, benzene margins for European producers will be sustained for longer this year, for the very least throughout the third quarter. This is due to robust downstream demand in Europe, a drop in European imports and delayed benzene startups in Asia.
Benzene’s premium to naphtha this year currently averages around $420/mt, which is well above the industry-estimated break-even level of $200/mt to $250mt. In comparison, the premium averaged at $280/mt in 2016, and $234/mt in 2015.
Considerable benzene exports from Europe during the fourth quarter of 2016, coupled with a series of minor production difficulties in Europe in Q1 set the European market up for strong start to 2017. As workable benzene arbitrages into Europe have remained shut since early second quarter, Europe has had to rely on its own supply for the largest parts of this year.
With the bulk of cracker turnarounds in Europe behind the market, support for European benzene is likely to come from Asia. At the beginning of the year, nearly two million tons of new benzene capacity was expected to come on stream in Asia. These new volumes were expected to be largely consumed in Asia, as large downstream projects – mostly styrene plants - were expected to come on stream as well, most notably in China.
Several benzene startups have however been pushed back, and at the moment, only seven hundred thousand tons of new benzene capacity is anticipated to come on stream in Asia, or around a third of what was scheduled at the beginning of the year.
On the other hand, China is still planning to bring on stream plenty of downstream plants this year, requiring up to 1.94 million metric tons per year of benzene, far outstripping new capacity coming on stream this year.
On the cascading effect of the development of benzene on other aromatics, toluene prices are likely to get the biggest boost. As a result of a globally strong benzene market, toluene-to-benzene conversion margins have improved in 2017 compared to the two previous years.
Those margins are likely to stay supported as long as benzene is globally short. Mixed xylenes are a byproduct of toluene disproportionation for benzene conversion, so strong run rates at such plants could create a glut of mixed xylenes.
Until next time on The Snapshot, we’ll be keeping an eye on the markets.