Rise like a phoenix -- will benzene climb out of crude wreckage?
January 15, 2015 -- By Maria Tsay in London
The bearish sentiment which rippled across the global benzene market toward the end of 2014 is expected to prevail in the next few months, but the market could see a change of wind later in the year, as Asian length gets partially absorbed and the global crude oil market finds a new equilibrium.
The fortune of the European benzene market has been shaped predominantly by three factors in recent months: the collapse of the crude oil prices, increased exports of benzene out of Asia and missing benzene demand in Europe amid numerous outages.
Benzene prices in Europe have more than halved over the course of last year, as market convulsions triggered by the light cracking in the Atlantic basin gave way to the lethargy stemming from the launch of new capacities in Asia.
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This triggered a 61% slump in price as benzene fell from $1,532.50/mt CIF ARA in January to a 5.5-year low in December of $589.50/mt CIF ARA, even outpacing the steep fall in crude oil.
Benzene's premium to feedstock naphtha -- a proxy for benzene production margins -- reached $636.75/mt at the peak of the market in January and sank to $111.25/mt at its bottom in December, down 82.5% over this period.
Historically, a $250/mt spread has been considered as breakeven.
As OPEC remains reluctant to cut oil production and thus curb the price decrease, finding a sustainable equilibrium has been left to market forces.
According to analysts, crude oil price could slip further in the first quarter on seasonal refinery maintenance plans and with stiff competition from oil-producing nations for market share supply of oil in international markets is still rising.
Additionally, Russian supplies could see an uptick in coming months, as Russian companies take advantage of the depreciating ruble and the overhaul of the oil products export tax regime.
Russia's export duty on its main Urals crude has dropped to 42% in 2015 from 59% last year. For example, in January it has been set at $170.20/mt, or $23.30/b, down 38.7% from $277.50/mt in December.
However, low prices are already leading to decisions to cut investments into more capital-intensive projects, including shale oil.
The resulting decrease in supplies is likely to start manifesting itself around mid-year.
Not so pretty poly
European demand for benzene is also likely to be impacted by events downstream.
Up to 30% of the total European styrene capacity was offline in the fourth quarter last year either as a result of unforeseen production issues or on scheduled -- though not always publicly announced -- maintenance works.
These included Shell's Moerdijk 450,000 mt/year plant in the Netherlands, which was offline from the start of October until mid-December and BASF's 550,000 mt/year Ludwigshafen plant and Styrolution's 250,000 mt/year Antwerp plant, both of which returned from maintenance mid-December.
The only facility which remains non-operational is Ellba's 550,000 mt/year plant in Moerdijk, which was destroyed by the explosion in June.
Despite the restarts of these plants, the overall demand for benzene is unlikely to see a significant improvement, as the run rates of these plants will depend on the performance of styrene derivatives, such as polystyrene, styrene-butadiene-rubber and acrylonitrile butadiene styrene.
European producers of polystyrene, the major styrene derivative, have been struggling in recent years in the face of substitution with other plastics and rising imports, mainly from North Africa in case of general purpose polystyrene and Asia in case of high-impact polystyrene.
The difficult environment has recently led to Styrolution's decision to close its 80,000 mt/year Trelleborg polystyrene plant in Sweden.
In addition, there is a concern that the current investigation into possible dumping by the Egyptian polystyrene producer in Turkey could lead to an increase in Egyptian supplies into Europe, which could further undermine Europe's own production.
It's the phenol countdown
Competition from other regions remains a concern for European phenol producers too.
As the global phenol capacity rises it is likely to have a double impact on the benzene market -- on the one hand, reducing the competitiveness of European phenol makers, but on the other hand, absorbing some of the benzene length.
European phenol producers had to give away some of their margin this year in order to maintain the same order volumes as in 2014.
Last year contractual prices were set at around Eur250/mt over feedstock benzene prices. This year the fee had to decrease by Eur10-15/mt.
Previously European phenol producers felt most of the pressure from phenol supplies from the US and supplies of downstream bisphenol-A from Asia.
This pressure was somewhat eased last year by turnarounds in other regions, but could intensify as new facilities start up.
For example, both Shanghai Sinopec Mitsui Chemicals and Cepsa Quimica have started their 250,000 mt/yr phenol plants in Shanghai over the fourth quarter last year, and should be currently ramping up production.
Furthermore, Taiwan's Formosa Chemicals and Fibre Corporation was scheduled to start its new 300,000 mt/year plant in Ningbo, China, by early January.
As China gains self-sufficiency more Asian phenol could hit international markets.
However, on the other hand, these capacity additions alongside new capacities in other benzene derivatives would partly offset the rising benzene production in Asia, and thus limit the knock-on effect on the Atlantic basin market.
Asian benzene exports rose last year by around a quarter.
These start-ups as well as a likely reduction in run rates at the new benzene/paraxylene units are set to slow the growth rate in exports this year.
Business as usual
Little change is foreseen in the balance of the US benzene market, compared to the developments in the previous several years, despite a potential decrease in investments into shale projects.
It is still expected that the availability of pyrolysis gasoline will be gradually tightening in the region as crackers rely increasingly more often on lighter feedstocks, which have a low yield of aromatics.
Production of benzene at the refineries could see a slight short-term uptick, should lower crude oil prices lead to a more active driving season this year, and should increased gasoline demand dictate higher refinery run rates.
A question mark remains over the origin of the benzene imports which will fill in the widening deficit.
Last year with the start-ups of new benzene units in Asia, the US accelerated its imports from this region at the expense of Europe, which also sends a sizeable volume of benzene to the US Gulf.
According to the most recent data from Eurostat, EU exports of benzene dropped by around a quarter in the first 10 months of the year to 124,697 mt.
The main destination for European molecules is normally the US.
As new Asian downstream units absorb increasingly more benzene within the region, the aggressive injection of benzene into the US could ease towards the second half of the year.
In this case the US is likely to look towards Europe once again as a natural supplier of incremental tons.
Next article: Rise in EU tariffs to constrain -- but not quash -- PE imports from Gulf