PX-naphtha spread narrows to below $300/mt amid weak demand and strong naphtha

Since the beginning of Feb, PX price has been shivering lower despite the rise in crude oil. As of Feb 15, PX price has lost 5.5% compared to the beginning of the month, meanwhile, Brent crude futures price has gained 3%. PX moves divergently with crude oil, and PX-naphtha spread gets squeezed.

1. Weak demand

Prior to the Spring Festival, end-use demand was expected to recover. Commodity futures and stocks market, as well as PX, PTA, PFY and PSF prices advanced obviously.

After the Spring Festival holiday, however, the rosy expectation for demand recovery did not materialize. Migrant labors returned later-than-expected, and thus companies were short of hands. The confidence was dampened by lack of domestic sales and export orders. With the good expectation quietening, the markets corrected.

The resumption of end-use weaving and twisting mills was slow, and manufacturers were not in the urgent need to buy feedstock, leading to low sales/production ratio of PFY and PSF. Though the ratio for PFY has increased from 20% before the holiday to 30-40%, the production cannot be consumed and the inventory piles up inevitably with rising plant operating rates.

Meanwhile, China polyester plant operating rate has increased obviously after Feb 5, to 78% as of Feb 10. It is expected to further rise to approach 80% in Feb. As supply outpaces demand, polyester producers lowered prices to boost sales, and the profits got squeezed again. As a result, the incentive to raise operating rate was curbed this week.

Consequently, PTA was under immerse pressure. Due to weak demand from downstream polyester plants, PTA product inventory increased, while the price slipped continuously with processing spread squeezed. PTA to PX processing spread had narrowed from 456yuan/mt in the beginning of the month to 166yuan/mt as of Feb 15, down by 63.6%. Amid negative profit, PTA producers became less active with reduced buying of feedstock PX. PX supply shortage got relieved greatly. Mar materials were traded at parity or slightly discount to average price.

2. Strong naphtha

Demand for naphtha improved, spurred by strong requirements for refined oil products in US and India, as well as restarts of crackers. Naphtha price strengthened, advancing 2.4% since the beginning of the month. Naphtha to Brent crude oil spread widened from $80/mt in early Feb to $93/mt as of Feb 15, up 16.3%. In terms of profit distribution, from crude oil to PX, PX-naphtha profit took a smaller percentage, while that of crude oil to naphtha was getting larger.

In the future, PX-naphtha spread may further narrow, weighed by weak demand.

PTA-PX processing spread has currently crunched to below 200yuan/mt, and if acetic acid cost is included, the spread of PTA to its feedstocks is only 65yuan/mt, indicating negative profits.

When PTA processing spread gets squeezed sharply, PTA plants usually either cut operating rates or shut down. According to the current schedule, Honggang plans to shut its 2.5 million mt/yr PTA plant in Mar for maintenance; INEOS cuts the operating rate of its 1.25 million mt/yr PTA plant this week and pulls forward its maintenance plan to mid-Mar; Zhongtai Chemical postpones the restart of its PTA plant; Sanfangxiang shut one PTA line unexpectedly earlier, and has delayed the restart; and in addition, it is said that Hengli may shut two PTA lines in Mar and Apr for maintenance, but it has not been officially confirmed, which testifies that PTA plants would take measures in response to the sharp decline in processing spread.

Amid PTA plant turnaround plans and unexpected shutdowns, some PTA producer begins to negotiate with suppliers to cancel or delay PX contracts. If more PTA plants turn to shutting or cutting operating rates later, the availability of PX could further increase, bringing pressure on PX prices.

On supply front, PX plant operating rate is currently high, and PetroChina Guangdong has started PX production on Feb 15 and plans to ramp up the run rate.

In a conclusion, the tight supply of PX is expected to further relieve. However, demand for refined oil products is anticipated to increase, US gasoline stocks are low while China gasoline consumption is expected to rise. The high margin in refined oil products may continue supporting demand for aromatics as blending components and then propping up PX prices. However, the driving force to aromatics and PX during peak consumption season for gasoline may not be so strong as what we saw in last year.

Outlook of refined oil paints a rosy picture. Demand for PX is expected to weaken, and supply is stable but PX production may reduce amid intensive plant maintenance during turnaround season. PX price may slip and PX-naphtha spread may squeeze further in the near term. In the medium run, with support from supply reduction due to turnarounds, PXN spread is unlikely to drop below $250/mt.