Martha Dowding

Martha Dowding is a Research Associate at Onyx Capital Advisory. Prior to joining Onyx Martha completed her studies at Newcastle University where she studied Chemical Engineering and gained experience in writing comprehensive research reports.

Taking Plastic Measures

3 min read
Taking Plastic Measures

In plastic, not only does man have a best friend, with an estimated 460 million metric tons in use in 2019, (and a little bit extra in our bloodstream now), but propane and naphtha have a vested interest, as feedstocks used to make the stuff.

The current state of the petchem market is starkly different between Asia and Europe. As with less sophisticated oil products, the strength of the petchem complex moves both as a whole and with comparable intra-product strength. As a whole, market right now has softened a lot in Asia with weakness coming from all directions, seemingly.

Asia

PX (paraxylene) is an aromatic hydrocarbon (see the diagram below if your GSCEs were a while ago) and is suffering from oversupply. Making matters worse, benzene margins are strong. Benzene is made in TDP units which are being run at high operating rates to get the most out of the positive margin – producing a lot of PX as a by-product and contributing to the PX glut. Not only is there this oversupply issue but the demand for downstream polyester is pretty poor (thanks metal straws), further contributing to the PX weakness.

Looking to naphtha, the margin for cracking Asian naphtha into ethylene has flipped negative. This has led to poor cracking demand and removes a MOPJ demand avenue. An Indian producer attempted to tempt buyers by continuing their ‘early bird’ discount, essentially tapping the for-sale sign.

Europe

If the Asian petrochemical market remains weak, there may be more exports of propane and naphtha from Asia and the Middle East to Europe, where demand and selling price are stronger and has been further supported by Suez Canal issues. The supply of propane in Europe has been limited by the availability of imports from the US, the Middle East and Asia, which the Red Sea blockage and the winter storm in Texas have disrupted.

TotalEnergies’ PX plant has been offline Mar 1-18 for scheduled maintenance which further strained supply. As a result, some petrochemical crackers in Europe are running at 80% capacity, this is high compared to the estimated 60% average last year, and the petrochemical propane demand in Europe is truly maxed out. Although, we have not seen a great deal of support for Euro naphtha from this, with pretty weak pricing as the excitement of the Russian refinery news has been digested.

This could be the end of a short and simple article but as usual, the market is in a state of flux and there are some possible bearish factors for Europe and some strength coming into Asia.

So, what could change?

The European market may not be as robust as previously thought as sellers have not seen their March polyethylene (PE) price hikes met and have been forced to lower them, with the high prices putting buyers off. However, PE sellers in Europe are eyeing a rebound in April, as they expect the ethylene contract to settle higher due to anticipated strength in naphtha so it may still be a valid path for excess petchems to be arbitraged to Europe in anticipation of continued stronger pricing.

What about Asia?

The oversupply of PX in Asia is expected to ease in the coming months, as some Asian PX plants undergo maintenance turnarounds, and the summer driving season increases the demand for octane-boosting blend stocks.

Aromatics (scroll up for a diagram refresher) like xylene and toluene are in greater demand in the summer driving season as they can be used to increase the octane rating (RON) of gasoline, which is vital to meet the summer specifications put in place so that the fuel is more resistant to premature ignition at higher temperatures. This could give some support to these sinking aromatics. In a further indicator of possible better-expected demand, a major Taiwanese PVC producer increased April PVC pricing, which seems a little surprising given the total state of the Asian petchem market now but is a bullish marker of some stronger demand sentiment (if it is in any way substantiated).

Wasn’t this about naphtha?

If the European petchem market becomes inundated with Asian product, we may begin to see a greater reliance on the strength of gasoline demand propping up the naphtha market as the petchem demand avenue is dampened. Summer driving season requires more aromatics and more naphtha, so we may see more support from the driving season in European naphtha, but if not, we may be at risk of weak Asian petchems polluting the waters of European naphtha.

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Martha Dowding is a Research Associate at Onyx Capital Advisory. Prior to joining Onyx Martha completed her studies at Newcastle University where she studied Chemical Engineering and gained experience in writing comprehensive research reports.