PX price falling continuously and PXN spread squeezed

PX price continued declining last week, down to $975/mt CFR on May 12, down heavily by 6.4% over the week. PX-naphtha spread was squeezed to below $400/mt after hovering high for nearly two months, narrowing from high point of $438/mt to $386/mt as of May 12.

1. Feedstock market was weak

Though OPEC+ implemented new round of production cuts beginning from May, oil price got barely boosted. Firstly, US bank failure risk raised concerns about economic downturn, dealing a severe blow to oil prices. Secondly, with the approaching of US debt ceiling negotiation, expectation of government debt default risk increased. US inflation remained high, and expectation of interest rate hike continued, also impacting oil prices. Meanwhile, naphtha market was lackluster, amid lukewarm demand, due to turnaround season for crackers in Asia. Weak feedstock brought pressure on PX prices.

2. PTA declines fast

PTA availability increased obviously last week, with some large plant and trader active in selling. PTA spot to futures basis narrowed rapidly from 550yuan/mt to 250yuan/mt last week. As of May 12, PTA spot price declined to 5615yuan/mt, down from the high point of 6460yuan/mt on Apr 17. PTA futures slumped as well to close at 5244yuan/mt for Sep futures contract, due to increasing short positions as well as fall in crude oil price. As a result, the decline in PX accelerated in line with PTA price drop.

3. PX lacks support from fundamentals

China PX plant operating rate has rebounded and kept stable, and then the supply shortage earlier gets relieved. Supply is expected to further increase with several plants restarting later. As the trading enters on Jul goods which are bounteous, it would be less supportive to PX price.

As for PTA, the support to PX is also limited as supply availability increases and spot to futures basis narrows fast, despite rise in polyester plant operating rate.

In terms of trading, similar to PTA, the support to PX weakened after investors suspended buying. Without new buyers pushing up prices, the balance of power between bulls and bears shifted, with the selling intentions on PX increasing significantly. Against the backdrop of weakened costs and market sentiment, PX prices began to experience a sharp decline, which can also be considered a correction to the pricing by previous buyers. With the changing supply and demand, some trading strategies have shifted to shorting PXN, and even due to some maintenance of PTA plants and increased polyester polymerization rate, there were rumors of trading strategies that short PX while going long on PTA. All of the above have suppressed the prices.

Amid bearish sentiment, naphtha price was dragged down by crude oil, but the drop was smaller than that in PX. As a result, PXN spread squeezed sharply last week.

PTA supply is sufficient in the short term, but may turn tight in the medium run as polyester plant operating rate has elevated and buying intentions increased, especially in mid and late May when several PTA plants would undergo maintenance. If PTA rebounds, PX may get bolstered, however, rebound in PX could be capped by PTA plant maintenance, restarts of PX plants, and sufficient supply of Jul and Aug PX goods. Currently, PXN spread may find support at $300-350/mt, on the back of low PX inventory, restocking requirements from PTA as well as PX plant turnarounds.