Thin spot activity and softening global values are weighing down on European toluene sentiment, sources said on Monday, although there are various factors that could drive the market in the second quarter, leaving many unsure of its future direction.
Following the settlement of March contracts at $1,125-1,127/tonne on a FOB (free on board) NWE (northwest Europe) basis, buyers felt that there was little incentive for them to pay higher than this for spot material, as demand outside of contract was limited.
Despite supply restrictions in Europe since January, sources had not seen any players scrambling for material to cover positions, indicating that demand outside of contractual volumes remains limited overall.
Falling prices in the US as well as in Asia, where FOB Korea numbers dropped to a 20-month low late last week in tandem with the fall in downstream paraxylene (PX), are also keeping European buyers bearish towards the end of the first quarter.
While traders had previously been eyeing the arbitrage window into the US in late February, prices in the region have edged lower since then amid limited activity.
The European toluene market has increasingly been an export-driven one, with 2013 showing a 26% rise in exports from the previous year. This trend has been driven by the twin pressures of weak European demand and a strong US market steering global pricing.
There was also some speculation earlier in the first quarter that the US driving season would support strong toluene demand in the region. Toluene is used as a high octane booster in gasoline fuels.
However, with toluene prices in the US moving below $3.70/gal FOB last week, cheaper xylene has become more attractive for the gasoline blending sector. European numbers would have to move down to around $1,050/tonne in order to make exports to the US economically viable.
Offers for the second half of March were heard at $1,140/tonne, but there was no corresponding buyer interest. Without any export opportunities from Europe to other regions, this was curtailing any demand traders.
But with benzene spot prices showing signs of edging back up above $1,400/tonne due to limited availability at least in the short-term, there was talk at the European Petrochemical Luncheon (EPL) in Madrid last week that the spread over toluene would support HDA (hydrodealkylation) production, where toluene is converted into benzene, which could potentially support strong toluene demand.
However, some players remain sceptical of any sustained on-purpose benzene production in Europe due to market volatility.
“We have seen the benzene/toluene spread open up, even earlier this year,” one trader said. “But the problem is that it isn’t like a switch you can turn on and off. It depends on whether the economics will remain in place for at least four to six weeks.”
And with global benzene prices easing off and a growing sense that the market is facing a global downwards correction on pricing following the volatility seen since late 2013, several sources do not expect the spread to stay wide enough for long enough to make HDA production viable. (see chart right)
Although the two products in Europe have a markedly different dynamic in terms of spot liquidity, they are plagued by the same fundamental pressures on supply.
And while toluene can be used for benzene and xylene production, as well as in the gasoline blending sector, it is also used to make various solvents and also in the production of toluene di-isocyanate (TDI) for urethanes and foams. With a myriad of potential applications, this also further complicates any outlook on pricing and demand.