Viewpoint: NWE benzene to bow to pressure in 1Q

The European spot benzene market will bow to renewed pressure in the first quarter of 2021 after a price rise in December triggered by supply curbs arising from cracker production issues and unseasonably robust demand.

Prices were buoyed during the usually-slow December by inventory restocking and gradual, steady economic recovery from the pandemic-induced slump in the second quarter, but this will probably start to ease throughout the first quarter. While the roll-out of Covid-19 vaccines and an economic rebound in China gave downstream producers some optimism to rebuild their very low stocks, confidence is fragile and could easily be shaken by escalating virus concerns and because it will take months before the vaccination programme could have any meaningful economic effect.

Crackers will run hard ahead of a heavy planned maintenance season in the spring, and with naphtha seasonally a preferred feedstock in the winter for units with feedstock flexibility, more pygas-based benzene will enter the market. Production margins firmed in December, with the benzene-naphtha spread rising to $350-400/t, and will probably stay at around $200/t in the first half keeping benzene extraction a more attractive option for pygas than for gasoline blending.

Benzene supply will be curtailed once again in the second quarter when the cracker turnaround season is in full swing. Even so, refineries and reformers will again struggle to hit high operational rates with fuel demand likely to remain low. Refinery operating rates have stayed close to 70pc, around 10-15pc below pre-Covid levels, curtailing output of the reformate-based benzene that accounts for a third of benzene capacity in Europe. Benzene from pygas contributes around half of the total.

Benzene imports, mainly from India, eastern and central Europe, the Mediterranean region and the Red Sea, will be unabated, partly offsetting the reduction in domestic output.

No major downstream turnarounds, including styrene, cyclohexane, aniline and cumene, are planned in the first half. But a slowdown is inevitable in styrene demand, which consumes nearly half of Europe's benzene capacity, as global length returns thanks to the around-4mn t/yr of capacity coming on stream in China in the coming months. This will diminish arbitrage opportunities from Europe, from where around 10,000-20,000 t/month has left for China since 2018. This arbitrage has been closed recently.

European imports of US styrene have nearly doubled to 35,000-40,000 t/month since 2019, as the US sought alternative destinations because the trade war with China, it's main market, meant selling there became untenable. Although US policy may change under the direction of president-elect Joe Biden, China's styrene import requirements will shrink in 2021. This will weigh on operating rates of European styrene units, particularly the ethylbenzene-styrene producers that will adjust output to protect margins at close to $200/t over benzene. The styrene-benzene spread dropped to $145/t on average so far in December as benzene prices rose, taking the average to $211/t in the year to date.

Styrene demand for polymers production has been relatively robust as people stayed home, significantly buoying demand for packaging and white goods. Expanded polystyrene (EPS) benefited from continuing construction activities even after the peak summer period, with a spate of home improvements and renovations further underpinning demand.

The automotive sector, one of the major markets of other styrene-based polymers such as ABS, as well as cyclohexane and phenol, is experiencing a gradual improvement in production in Europe, helped by increased exports to China. This is likely to continue in the coming months, partly offsetting the contraction in domestic demand.

Spot benzene prices for the prompt month peaked at 11-month highs of $860/t cif NWE on 18 December. The December-January spread was in a wide range of $20-60/t backwardation, based on Argus' daily assessments. February and March were tentatively discussed at least $100/t discounts to December.

By Monicca Egoy