Viewpoint: European wax margins pressured by imports

European wax prices will be constrained in 2020 by sustained imports of low-cost Chinese product.

European production capacity is likely to be steady, with no Group I planned maintenance or plant closures confirmed. But wax output may be curbed by reduced base oil production, which would support prices.

Weak base oil margins last year prompted refiners to cut run rates and to prioritise production of fuels, with a consequent knock-on effect for wax production. The average monthly price premium of Group I SN 150 over vacuum gasoil (VGO) fell by €47/t to €192.50/t in 2019, the lowest in 10 years. Prices held at a premium to gasoil for only six weeks in the year.

The International Maritime Organisation (IMO) sulphur-emissions regulation, now effective, will further encourage refiners to prioritise production of low-sulphur fuel oil over base oils and wax, especially if margins for the latter two products are weak. But, a continued influx of Chinese wax will buffer any price increases arising from reduced domestic production or seasonality.

Large quantities of low-cost Chinese paraffin wax slabs have been arriving in Europe, especially after the latest escalation of US tariffs on Chinese wax. This is likely to continue, absent any lasting resolution to the US-China trade dispute. This product is finding willing buyers in Europe, where imports of Chinese paraffin wax rose by 34pc on the year in the first three quarters of 2019 with Poland as the largest consumer.

European exports of fully-refined wax also increased over this period, reaching their highest level in at least 10 years and with significantly more going to the US. A saturated European market will prompt European wax producers to search for other markets, and the US tariffs on Chinese wax will keep opportunities open for European exports to the US.

Chinese synthetic wax production capacity will increase further in 2020, with supply heading for Asia-Pacific. This will free paraffin-wax supplies for export to Europe. Those in Europe that already buy from China could increase their purchases. But Chinese exporters may raise prices after lunar new year in late January, as they have done in previous years. A significant price increase would lower the attractiveness of these products in Europe, especially if the euro remains weak against the US dollar, as Chinese exports are priced in dollars.

European prices could receive some support at the beginning of 2020 when buyers restock inventories, although seasonal demand will probably be less pronounced than in 2017 or 2018. Seasonality at the end of 2019 was not reflected in spot prices partly because candle makers have been sourcing product more evenly throughout the year or through term contracts. This provided security of supply and avoided unmanageable price rises in the last quarter of the year.

By Erik Hoffman