PX: a seesaw battle of strong fundamentals and weak expectation

In May-Jun, PX market spiked before pulling well back. PX price soared from $1208/mt in early May to as high as $1513/mt but then fell back to $1139/mt CFR China/Taiwan as of Jul 12. PX-naphtha spread also widened significantly from $303/mt to $685/mt but then squeezed to $342/mt over the same period.

With the market moving into the earlier price range, it would still be a seesaw battle of strong situation against weak expectation.

1. Strong situation

With PX-naphtha spread widening rapidly in Jun, PX plant operating rate rebounded fast, incentivized by good profits. However, China domestic PX supply increase fell short of expectation due to some unexpected shutdown and unplanned operating rate cuts. PX plant operating rate has dropped by about 6 percentage points from the high point of 85.6% in H1 Jun in China, which would lead to an obvious correction of production from earlier estimation.

In addition, with China domestic MX price recovering losses, PX-MX price spread on yuan basis has narrowed obviously. It squeezed from the high point of 2600yuan/mt in early Jun to the current 500yuan/mt, down 80%, reflecting losses for PX plants based on merchant feedstock MX. As a result, PX plants dependent on merchant MX and those plants who purchased MX to ramp up production earlier, may reduce the operating rates.

In addition, due to frequent maintenance and unexpected shutdown, as well as relatively low imports, PX inventory increased only in Mar but kept decreasing for the rest months in the first half of 2022. China PX inventory is expected to drop by 500kt in Jan-Jun. Moreover, as domestic PTA producers were cautious in buying due to sharp PX rise earlier, PX inventory in some PTA plants is quite low and they could enter to restock.

2. Weak expectation

Weak demand is the biggest negative impact. Though China polyester inventory had dropped for some periods, the profits recovered some losses, and polymerization rate increased slightly after end-Apr, the inventory has rebounded since early Jun and may continue rising, while the reduction was limited in end-Jun or early Jul. Polyester profits also get squeezed again, with POY and FDY profits mired in negative territory. With the high inventory and losses, China direct-spun PFY operating rate has declined to around 65%, new low since the outbreak of coronavirus pandemic in early 2020. Polyester composite operating rate has dropped to below 80%, and may further fall.

Recently, with the peak demand season for electricity in summer, the industry usually cuts production and reduces operating rates due to high temperature and electricity consuming season, which could further drag down polyester and downstream plant operating rates and affect demand for feedstock PTA.

3. Imports may increase

Starting from mid-Jun, US gasoline price and gasoline to crude oil price spread both has declined. Asia to US aromatics arbitrage spread has also squeezed, though it remains wide. Asian PX market is less supported by the arbitrage as US gasoline weakens and it would take time for the cargoes to arrive at US, which is echoed by softer buying sentiment recently.

Therefore, China’s PX imports may rebound gradually in Aug after previous months of low imports, and then China PX supply shortage may get alleviated.

It is estimated that China PX inventory may decrease by 200-250kt in Jul, but may increase by a combined 150kt in Aug-Sep, and further rise by 50-100kt in Oct.

The trading in PX market is currently centering on Aug and Sep goods and would roll over to Sep and Oct goods on Friday, therefore, there’s still downward pressure on PX price. In addition, as PX had taken up the largest part of profits in the industry chain, it could hardly sustain. Support from refined oil products market in the US has weakened. Therefore, Asian PX price slips rapidly.

Even after the rebalance of industry chain profits, PX still has good fundamentals. Domestic production growth is anemic before new capacity coming on line in the fourth quarter. PX-MX spread is approaching break even line. Meanwhile, PTA plants with low inventory may restock PX and new upcoming PTA plants may prepare feedstock in advance. PX market is still bolstered by strong fundamentals unless there’s sharp decline in demand and intensive PTA production cuts.