Santosh Navada: Welcome, everyone. I'm your host, Santosh, and I'm joined by Ashish Kulkarni, Lead Aromatics Consultant here at Argus. Thanks for joining us today for today's podcast. We'll unpack how the escalating Middle East conflict is upending global flows of benzene, toluene, and xylenes, and why shortages of nafta are hitting.
Asia's export-oriented economies particularly hard. We'll dig into immediate impact of the conflict, the ripple effect on downstream industries, and whether this can evolve into demand destruction across the globe. So Ashish, how exactly has the Middle East conflict intensified crude price volatility and reshaped the cost dynamics of the benzene, toluene, and xylenes value chain.
Ashish Kulkarni: Hi, Santosh, and thanks for having me on the podcast. Well, to answer your question, the geopolitical tensions in the Middle East because of the war have certainly raised the risks around crude movement as well as refined products movements and supply chains, including for NAFTA.
And according to all the market assessments, of course, the conflict has triggered fears of global oil supply shortages, pushing crude prices sharply higher. We know that Brent crude has been more or less well above $100 per barrel for the last few weeks driven by these supply fears. Now, this matters a lot for the aromatics chain because this chain is fundamentally tied to crude oil and naphtha economics. When crude spikes carrying the naphtha prices up along with it, the cost structure for BTX production
that is benzene, toluenes and xylenes production goes up as well. And especially so in regions which rely heavily on imports of naphtha and do not have a complete in-house refinery integration.
Santosh Navada: Indeed. Now, NAFTA is considered as lifeblood of Northeast Asia's petrochemical industry. And even the slightest disruption can send shockwaves through the region's interconnected value chains. So as crude markets swing and trade routes face instability, the pressure on NAFTA-dependent economies becomes
impossible to ignore.
So how has the tightening of NAFTA supplies driven by crude volatility and disrupted shipping lanes, intensified pressure on Northeast Asia's export-oriented petrochemical economies and tightened BTX availability across the region?
Ashish Kulkarni: So you see, Northeast Asia, especially South Korea, Japan, and Taiwan, are structurally quite dependent on imported naphtha. And a lot of that naphtha comes from the Middle East through the Persian Gulf or the Arabian Gulf with crude volatility and a disruption in shipping.
Santosh Navada: All right.
Ashish Kulkarni: We are seeing now very high premiums for NAFTA. And along with that, there are actual physical shortages also. And this volatility across NAFTA as well as, of course, LPG supply chains is disrupting the flows.
and tightening the petrochemical markets in the whole of Asia. Especially this NAFTA shock has hurt economies like South Korea, which is a major exporter of aromatic products like benzene and paraxylene. On the other hand,
China has been comparatively less affected so far, perhaps because it sources crude oil from a more diversified set of suppliers, including Russia, and also benefits from the fact that it has several world scale integrated refining and petrochemical complexes, which gives it more control over the upstream supplies. And also, it makes for a better profitability position across the entire value chain. Also, when NAFTA supply tightens,
Obviously, steam crackers are under pressure and they have to lower the operating rates, which translates to less pie gas, which again is a feedstock, especially for benzene. And this is exactly what we have seen in the current crisis with several.
naphtha crackers in East Asia and Southeast Asia declaring force measure or reducing their operating rates significantly. And because of that, obviously, and because of the cost push, the aromatic product prices have gone up substantially, but they have not been able to go up
to the same extent as the increases in NAFTA. And as a result of the fact that the entire cost push has not been able to be absorbed and passed along the chain, it has only made things worse for aromatics producers from a margin standpoint.
Santosh Navada: Indeed, and compared to benzene, how are the other aromatics such as toluene and xylenes fared in the middle of such turmoil?
Ashish Kulkarni: So just like benzene, toluene and xylenes have also seen very aggressive price increases because of this crisis situation. In fact, toluene and xylenes have, especially xylenes, I would say, have fared a little bit better, more so paraxylene compared to benzene.
For example, the FOB South Korea's Helen prices are past $1,100 per tonne a couple of days back. And we have seen daily price spikes of 3, 4 percent, which is quite unprecedented, frankly.
As far as toluene is concerned, toluene also saw increase of about close to 50% since the conflict started. Paraxylene has seen price increase of close to 40% and so has mixed xylenes. Market does expect the tightness to continue, especially because there's also a tightness in gasoline as well in Asian region, which in fact is then going to have the impact of, you know, increasing the alternative value for some of these aromatic products when they are used for blending into the gasoline pool, and that's going to only reinforce the pricing pressure on these products. So all in all, it does reflect a widespread trend which is there globally, where the aromatic
prices are going to rise and stay elevated as long as the crude volatility remains and the refining economics also remains disrupted.
Santosh Navada: Indeed. Now, as disruptions intensify across global feedstock routes, even the most established petrochemical producers are going to find themselves really pressed against the operational limits. With NAFTA supply tightening and shipping risks escalating,
the impact is not just theoretical, it's directly affecting production across Asia Pacific and the Middle East. So how are mounting feedstock disruptions and tightening NAFTA flows pushing key petrochemical producers towards force majeure announcements and constraining BTX outputs across the region.
Ashish Kulkarni: Yeah, right. I mean, so we have seen that as the NAFTA supply has tightened several producers across Asia and Middle East. Middle East, of course, is mainly because they have simply not been able to ship out the products. So they have had to kind of declare force, measure or reduce the
production because the, you know, the tankages get full. But also several producers across Asia, like just to give a few examples, Idemitsu in Japan, Chandra Sri in Indonesia, PCS in Singapore.
They have already declared force measure for their products. And these market participants have highlighted that there is a critical disruption in the feedstock flow, not only for NAFTA, but also for LPG and other derivatives due to the Mideast.
tensions, which increases the likelihood of companies declaring force majeure when they cannot secure these feedstock products. And the aromatics chain is, of course, especially exposed because when you talk of benzene, the benzene production
is linked with both, you know, the refinery reformers as well as naphtha cracking. So also the case with Toluene and Mixxylenes. And obviously across all the three products, there has been a significant impact.
on the supply availability. Also, if refineries have to cut their operating rates because of oil shortages and are going to try and maximise fuel supply, or for example, LPG supply as is happening in India, that again is going to constrain the output of feedstocks for the aromatics production, such as naphtha or reformates. And that itself is again going to have an impact on exacerbating the supply shortages in these products.
Santosh Navada: I see. And so how are the different regions coping with the impact of this conflict? I'm venturing that the producers based in different regions would be facing a different set of challenges. So let's start with Asian producers. How are they faring at the moment?
Ashish Kulkarni: So the Asia Pacific region accounts for most of the global aromatics volume and unfortunately it is also the most dependent on oil and naphtha flows from the Middle East. So, these are the regions which are the worst affected and which have seen
the maximum cuts in operating rate or outright closures as well. And also, some of them will obviously try and prioritise domestic supply over exports. So, any country in this region which is significantly dependent on
imported supply is perhaps going to feel the heat more than a country which has a surplus or which is self-reliant on any of these products.
Santosh Navada: Alright, and in comparison, how are the European and the Americas-based producers handling the current situation?
Ashish Kulkarni: Well, I mean, if you talk of America, I would say America is or the US is relatively insulated in terms of being more or less self-sufficient on the feedstocks. But obviously, and it also has sufficient domestic
feedstock availability as well as the aromatics production capacity. But it's not going to be untouched from a pricing perspective. Prices have gone up for all these aromatic products over there as well. And the fact that
Asian exports to the US, or for that matter, European exports, will probably not come because of the supply shortages there. And also the fact that the sea freight rates have gone up significantly. This is also going to push up prices in this region.
As far as Europe is concerned,
Europe was in any case facing cost disadvantages. And though they are not that dependent on flows per se from the Middle East, again, the increase in crude oil, the increase in naphtha prices, the compression, resultant compression in
margins for aromatic products is going to create a difficult situation for them also. The only positive for them could be that in the short term, it could mean some sustenance for local operating rates as the imports dry up.
not only of BTX products, but also of derivatives, and that might sustain operations over there over the next few months till everything kind of goes back to normal. One of the overall consequences of these rising prices and increased freight
costs is also going to be a reduction in inter-regional trade flows, prompting greater reliance on domestic production. And that's why I said that this shift might be beneficial for domestic producers, especially in places like Europe and North America.
Santosh Navada: Indeed. And generally speaking, how would the downstream industry be impacted by this conflict?
Ashish Kulkarni: So obviously one is the supply, physical supply tightness. The other is the steep increase in prices, which is obviously going to get passed on down the chain. For example, the short supply in benzene will impact
styrene production as well as styrene cost structure. In case of styrene, even ethylene prices have almost doubled in Asia, so that's another hit from a cost angle. The moment styrene costs go up, they will translate into polystyrene, ABS, etc., which is then going to go and increase cost pressures on consumer facing industries like home appliances, automotive packaging. Similarly, if you look at the xylene paraxylene chain, obviously Asia is the centre of the universe as far as the polyester is concerned. And reduced PX supplies are going to constrained polyester fibre as well as bottle grade and film grade resin markets. Not to speak of the increased prices creating problems as well, because we have historically seen that higher prices of polyesters does lead to some demand destruction because some of the discretionary spending by consumers then tends to go away. If you look at toluene, toluene derivatives basically go into coatings, inks, adhesives, paints, which again, you know, in a way, if you look at from a consumer perspective, these are all industries which make up what we can call as a discretionary spending. So all in all, all these disruptions and these price increases will of course reduce downstream operating rates. At the same time, it's also going to cause some kind of...
reduction in demand as well.
Santosh Navada: You touched up on demand destruction. So can you elaborate on that a bit?
Ashish Kulkarni: Yeah, I mean, demand destruction in the sense that, you know, on the one hand, you have high prices. Of course, when the supply short production is lost and that lost production come what may really cannot be made-up subsequently. High prices flowing through to the final consumer products.
will and that too at a time when there is a real danger of inflation, cost of living going up and most macroeconomic indicators in Asia deteriorating. So people are going to be a little bit wary about spending and spending more on
Products which are discretionary in nature. I mean, things like automobiles, clothes, other kind of textile products, and, you know, real estate and construction industries. And these are the industries where all the aromatic products finally get used. So
If all these commodity prices remain inflated while global GDP prospects soften, then you are definitely going to see demand destruction in all these industries, and that ultimately will lead to lower year-on-year growth in consumption.
And that's how all these geopolitical shocks are going to impact the global markets.
Santosh Navada: So in a nutshell, the Middle East conflict has amplified the structural weaknesses in the BT exchange. I think that would be safe to say, especially on Asia's dependence on NAFTA. So as flows tighten markets from Europe to Americas have started to feel the strain to a certain extent. Downstream users have started to face margin compression, and if volatility persists, demand destruction will eventually follow. And that really brings us to the end of this podcast.
Ashish, thank you so much for your insights and thank you listeners for tuning in. To find out more information about Argus Aromatic Services, visit
www.argusmedia.com. Stay tuned and stay informed.
Ashish Kulkarni: Thank you.
