OUTLOOK '20: Fate of Asia toluene hinges on gasoline, Chinese demand to be sidelined
Abstract
SINGAPORE (ICIS)--The fate and balance in Asia’s toluene demand-supply is likely to hinge on the downstream gasoline market in early 2020, with Chinese demand to remain lukewarm and secondary in the equation.
SINGAPORE (ICIS)--The fate and balance in Asia’s toluene demand-supply is likely to hinge on the downstream gasoline market in early 2020, with Chinese demand to remain lukewarm and secondary in the equation.
Gasoline demand comes as a slight wildcard, unexpected by most market participants, because of the ready availability for high octane blendstocks such as mixed xylenes since the fourth quarter of the year – mostly a result of poor downstream chemical production spreads.
“There is a ready selection of blendstocks, not everyone needs to be using toluene,” one trader said.
This is following the implementation of IMO 2020, a new regulation that affects the amount of gasoline extraction from refineries indirectly because of gasoil production.
Stronger-than-expected demand from some regions such as the US and the Middle East was the key reason why the market believed it was a wild card.
“We are seeing that some Tier 3 regions in the US are requiring more octane boosters as well to lower the sulphur content in their gasoline,” one trader said, adding that some turnarounds in the Middle East refineries in the first quarter of 2020 are likely to boost gasoline demand further.
Already enquiries have come through from Western traders looking to bring cargoes from Asia over to the US, even when the arbitrage is not really open in end-December 2019, to prepare for this phenomenon.
CHINA DEMAND TO REMAIN ON ARBITRAGE, MARGINS
Chinese demand, however, is unlikely to have a large impact on the market for early 2020, owing to the sufficient domestic supply from local makers and limited incentive for procuring imported product due to the forward risk.
Imports have been minimal into China on a monthly basis since 2019, with a record of below 20,000 tonnes for some months, which further support the idea of limited import demand extending into 2020.
“There’s no reason for all traders to take the risk in the US-denominated market, because it does not make economical sense given the volatile yuan against the US dollar for most parts of 2019,” one east China trader said.
So far, import volumes are only coming in when traders have margins for back-to-back business activity, such as buying CFR (cost & freight) China cargoes and distributing it on an ex-tank basis.
With the Lunar New Year also early in 2020, there was less reason for importers to stock up on product if they are unable to clear it quickly via domestic ex-tank distribution sales.
In addition, China has been increasing its export volumes since 2018 as producers in domestic China seek to broaden their trading horizon in light of rising supply in 2020-2021.
DOWNSTREAM RUN RATES ACT AS DOUBLE EDGED SWORD
A bleak outlook was present for downstream demand from the TDP and STDP sectors as well, as evidenced from the squeezed production spreads since the middle of 2019.
Already some TDP units have either shut or reduced their run rates since the middle of 2019, with less incentive to produce benzene.
Unlike before, when some producers look to cover the losses for benzene production with paraxylene production, such a situation is no longer possible since there was no workable production spreads between toluene and paraxylenes as well.
Further cuts are expected into 2020, with at least three producers already confirming lower run rates for these downstream units because of poor production economics.
This is against a backdrop of rising benzene and paraxylene supply respectively, from new start-ups in both China and outside China from the third quarter of 2019 to H1 2020.
These cuts are likely to add on to supply, which would need to be balanced out with demand from the deep-sea regions, since there are limited pockets of demand within Asia in other chemical sectors.
INDIA TO SEE MORE VARIETY OF IMPORTS
Separately, there could be a larger volatility in India’s demand going into 2020 – as limited volumes from the Middle East and fewer non-dutiable cargoes are made available.
Since the last quarter of 2019, imported product from the Middle East region has been erratic and lower in volumes.
“Typically there is around 10,000 tonnes per month available, but this has decreased to around 5,000 tonnes per month, which means that India may need to cover their requirements more from other regions,” one trader said.
India’s import demand is around 25,000 tonnes/month, he added.
Furthermore, with one producer in Singapore being stripped of non-dutiable benefits since mid-2019, some buyers have been forced to seek product elsewhere such as from Thailand or from Korea – which explains the increment in South Korean imports into India since the third quarter of 2019.
TRADING LIQUIDITY TO STILL INCREASE
Amid all these mixed factors, trading liquidity is still poised to increase with most traders likely to have more activity – since there are more spot cargoes up for grabs.
At least four traders have already signed FOB (free on board) Korea linked contracts with two main producers in Daesan and Yeosu, which could mean that there would be more engagement in the open trading market if they have yet to find a end-user for back-to-back business.
This was a stark contrast from 2019, when only two trader-based contracts were signed with producers in South Korea, since domestic demand was much more accommodating then.
Sellers have no choice but to offload more spot lots in 2020 since domestic demand from the benzene and PX sectors has been weak thus far.
Additional reporting by Samuel Wong, Clive Ong
Focus article by Trixie Yap
SHARE THIS STORY
Information comes from Internet sources
