Market opinion and analysis blog
Asian Aromatics Markets
Argus’ Santosh Navada spoke to Brian Leonal, Argus’ associate editor of petrochemicals in Singapore, about the key drivers that could impact benzene spreads in the coming months.
Santosh: Nowadays, a lot of focus is on the Chinese economy, on its real estate sector. How do you think the turmoil surrounding that sector is going to affect the aromatics market? Do you think it is out of woods or is there potential for increased downfall?
Brian: The Chinese industry is not out of woods by any means. The impact of this would continue to put pressure on Benzene and its derivatives for the foreseeable future. As an example, Evergrande recently decided to briefly stop trading in the HK index. The company also filed for Chapter 15 bankruptcy protection in the US - this provided some protection to its US assets while it worked on restructuring debts. This loss of confidence paired with weakening sentiment continue to affect the country’s construction industry, a major outlet for benzene derivatives, and the country’s central bank is trying to jump start economic growth. But it should be noted that the Chinese government is still on course to achieve its rather moderate growth target of 5% this year. And the emphasis is now moving towards the policies the government can utilise to sustain that momentum next year. In the last CCP’s meeting, economists noted some indications the country is moving away from extreme measures to stabilise the economy. So, while the country is not out of the woods by any means, there is light at the end of the tunnel.
Santosh: When you do think the margins will start to recover? I understand you got a chance to speak to APIC conference members recently, how was the sentiment there?
Brian: At the APIC conference, the prevailing theme was the margins would start to recover only after the existing capacity is absorbed along with some units getting shut down, possibly by the end of 2024. But now those timelines are being postponed to mid to end of 2025. So, producers will have to strategize operations. Hedging strategies, risk management, and flexibility will be important. The good news is, there is a wealth of data Argus provides to help make better decisions.
Santosh: How do you see the premium of PX-naphtha and benzene-naphtha spreads carried against gasoline cracks playing out?
Brian: Though producer economics still favour aromatics, the overall margins has seen a noticeable decline. For context, the PX-naphtha and BZ-naphtha spreads commanded $24/bl and $10/bl premiums respectively against the gasoline crack spread for the month of November. This dropped to $21/bl and $7/bl in December. In comparison, the average premium of PX-naphtha against gasoline crack since 2019 is $22/bl. The relative profitability of paraxylene and benzene as compared to gasoline is anticipated to trend downwards as refiners attempt to maximise profits from aromatics spreads.
Santosh: Talking of benzene derivatives such as styrene, how do you see that playing out?
Brian: Styrene is currently suffering from the perfect storm. A strong gasoline market means the opportunity costs of producing benzene is higher, and therefore producers would want to have higher premiums for steady supplies of benzene. On the other hand, the construction and real estate markets have been in the doldrums. It’s only recently that the real estate market started to show signs of recovery, outside China. The sheer amount of new styrene monomer capacities in Asia will mean it will take some time before demand growth can absorb the capacity additions. Importantly, the styrene monomer plants that have come online in the past few years, and those that could come online in the next few years, will be integrated with upstream crackers and refineries. The mega refiners see styrene as by-product credits. So, if the main PX and PTA products are profitable, styrene is seen as an alternative to selling benzene. The logical outcome will be the rationalisation of smaller standalone SM units, both POSM and EBSM. We have already seen this play out in the west, and we should expect this trend to spread to Asia too. Every crisis comes with opportunities. The difficulties faced by styrene producers mean valuations are trending lower – making them potential M&A opportunities. Consolidation, in some cases, can increase efficiencies, sharpen operating costs, and increase negotiating power in the market.
Santosh: How do you see the impact of electric vehicles on aromatics related commodities? Would it be too early to tell? They have been making a big splash, with the sheer growth of domestic electric vehicles manufacturers in China.
Brian: China’s use of new energy vehicles continues to put pressure on gasoline demand. New energy cars account for 90% of NEVs and racked up 158 billion passenger kilometres in China over January-August, a year on year rise of 81% according to data from China’s National Big Data Alliance for NEVs. That mileage replaced 120,000 b/d of gasoline over the same period, Argus estimates show. Car sharing has also started to put a dent in gasoline demand. The country’s car hailing platforms which allow passengers with similar destinations to share a ride received 824 million orders in August, up by 70% year on year, Ministry of Transport (MoT) data show. China is leading the world in terms of EV adoption and ICE replacement. From the perspective of the petrochemical industry, this is not necessarily a bad thing. EVs do need a lot of petrochemical products in their components. And this could lead the way in supporting the demand growth for petrochemical products. The development of EVs also necessitates more R&D into petrochemical materials, so overall it bodes well for the petrochemical industry.
Santosh: The US Federal reserve announced recently they intend to cut interest rates in 2024. Do you think that is going to have an impact on petrochemical product margins?
Brian: Yes, the Federal Reserve's signalling of three rates cuts in 2024 provided the momentum for a sharp rise in the middle of December. With each subsequent rate cut, the cost of borrowing is going to drop. There has always been a conception that lower interest rates lead to higher crude prices. Historically, that has not been the case – lower interest rates mean cheaper loans for new oilfield developments, and the incremental costs to produce an extra barrel of oil gets cheaper. The correlations between feedstock prices and petrochemical margins since 2008-2009 have been that of an inverse relationship. But it remains a fact that the development of new oil fields come with increasingly stringent environmental standards and regulations. So, we shall see how this impacts oil prices. Lower borrowing costs also mean it is cheaper to buy houses or spend capex, therefore it could lead to higher downstream demand.
Santosh: Thank you for joining us today, Brian. It will be interesting to follow these developments especially as there are so many moving parts. The data and insight included within this article comes from the Argus Benzene Outlook service and the Argus Toluene and Xylenes Outlook service. Request a free trial or more information.
Santosh: Nowadays, a lot of focus is on the Chinese economy, on its real estate sector. How do you think the turmoil surrounding that sector is going to affect the aromatics market? Do you think it is out of woods or is there potential for increased downfall?
Brian: The Chinese industry is not out of woods by any means. The impact of this would continue to put pressure on Benzene and its derivatives for the foreseeable future. As an example, Evergrande recently decided to briefly stop trading in the HK index. The company also filed for Chapter 15 bankruptcy protection in the US - this provided some protection to its US assets while it worked on restructuring debts. This loss of confidence paired with weakening sentiment continue to affect the country’s construction industry, a major outlet for benzene derivatives, and the country’s central bank is trying to jump start economic growth. But it should be noted that the Chinese government is still on course to achieve its rather moderate growth target of 5% this year. And the emphasis is now moving towards the policies the government can utilise to sustain that momentum next year. In the last CCP’s meeting, economists noted some indications the country is moving away from extreme measures to stabilise the economy. So, while the country is not out of the woods by any means, there is light at the end of the tunnel.
Santosh: When you do think the margins will start to recover? I understand you got a chance to speak to APIC conference members recently, how was the sentiment there?
Brian: At the APIC conference, the prevailing theme was the margins would start to recover only after the existing capacity is absorbed along with some units getting shut down, possibly by the end of 2024. But now those timelines are being postponed to mid to end of 2025. So, producers will have to strategize operations. Hedging strategies, risk management, and flexibility will be important. The good news is, there is a wealth of data Argus provides to help make better decisions.
Santosh: How do you see the premium of PX-naphtha and benzene-naphtha spreads carried against gasoline cracks playing out?
Brian: Though producer economics still favour aromatics, the overall margins has seen a noticeable decline. For context, the PX-naphtha and BZ-naphtha spreads commanded $24/bl and $10/bl premiums respectively against the gasoline crack spread for the month of November. This dropped to $21/bl and $7/bl in December. In comparison, the average premium of PX-naphtha against gasoline crack since 2019 is $22/bl. The relative profitability of paraxylene and benzene as compared to gasoline is anticipated to trend downwards as refiners attempt to maximise profits from aromatics spreads.
Santosh: Talking of benzene derivatives such as styrene, how do you see that playing out?
Brian: Styrene is currently suffering from the perfect storm. A strong gasoline market means the opportunity costs of producing benzene is higher, and therefore producers would want to have higher premiums for steady supplies of benzene. On the other hand, the construction and real estate markets have been in the doldrums. It’s only recently that the real estate market started to show signs of recovery, outside China. The sheer amount of new styrene monomer capacities in Asia will mean it will take some time before demand growth can absorb the capacity additions. Importantly, the styrene monomer plants that have come online in the past few years, and those that could come online in the next few years, will be integrated with upstream crackers and refineries. The mega refiners see styrene as by-product credits. So, if the main PX and PTA products are profitable, styrene is seen as an alternative to selling benzene. The logical outcome will be the rationalisation of smaller standalone SM units, both POSM and EBSM. We have already seen this play out in the west, and we should expect this trend to spread to Asia too. Every crisis comes with opportunities. The difficulties faced by styrene producers mean valuations are trending lower – making them potential M&A opportunities. Consolidation, in some cases, can increase efficiencies, sharpen operating costs, and increase negotiating power in the market.
Santosh: How do you see the impact of electric vehicles on aromatics related commodities? Would it be too early to tell? They have been making a big splash, with the sheer growth of domestic electric vehicles manufacturers in China.
Brian: China’s use of new energy vehicles continues to put pressure on gasoline demand. New energy cars account for 90% of NEVs and racked up 158 billion passenger kilometres in China over January-August, a year on year rise of 81% according to data from China’s National Big Data Alliance for NEVs. That mileage replaced 120,000 b/d of gasoline over the same period, Argus estimates show. Car sharing has also started to put a dent in gasoline demand. The country’s car hailing platforms which allow passengers with similar destinations to share a ride received 824 million orders in August, up by 70% year on year, Ministry of Transport (MoT) data show. China is leading the world in terms of EV adoption and ICE replacement. From the perspective of the petrochemical industry, this is not necessarily a bad thing. EVs do need a lot of petrochemical products in their components. And this could lead the way in supporting the demand growth for petrochemical products. The development of EVs also necessitates more R&D into petrochemical materials, so overall it bodes well for the petrochemical industry.
Santosh: The US Federal reserve announced recently they intend to cut interest rates in 2024. Do you think that is going to have an impact on petrochemical product margins?
Brian: Yes, the Federal Reserve's signalling of three rates cuts in 2024 provided the momentum for a sharp rise in the middle of December. With each subsequent rate cut, the cost of borrowing is going to drop. There has always been a conception that lower interest rates lead to higher crude prices. Historically, that has not been the case – lower interest rates mean cheaper loans for new oilfield developments, and the incremental costs to produce an extra barrel of oil gets cheaper. The correlations between feedstock prices and petrochemical margins since 2008-2009 have been that of an inverse relationship. But it remains a fact that the development of new oil fields come with increasingly stringent environmental standards and regulations. So, we shall see how this impacts oil prices. Lower borrowing costs also mean it is cheaper to buy houses or spend capex, therefore it could lead to higher downstream demand.
Santosh: Thank you for joining us today, Brian. It will be interesting to follow these developments especially as there are so many moving parts. The data and insight included within this article comes from the Argus Benzene Outlook service and the Argus Toluene and Xylenes Outlook service. Request a free trial or more information.
