PX-naphtha spread squeezes amid expectation of rising PX inventory

Asian PX-naphtha prices spread widened to as high as $394.2/mt on Nov 17, but then narrowed straightly to $332/mt as of Nov 30, hitting the low point since this Mar.

1. The widening of spread was short-lived.

PX-naphtha spread widened to approach $400/mt in mid-Nov, mainly attributed to that PX was driven up by robust PTA futures. Foreign investors increased positions of PTA futures, and then PX talking prices hiked in tandem in mid-Nov. However, weak crude oil weighed on naphtha prices, hence the rapid widening of PX-naphtha spread. In late Nov, however, as investors reduced PTA futures positions, Jan contract of PTA futures declined sharply, which also dragged down PX prices. As a result, PX-naphtha spread squeezed again, to around $350/mt.

2. The fundamentals of PX were weak.

Weak fundamentals and rising supply of PX were attributed as the main causes for the squeeze of PX-naphtha spread.

Concerning downstream plant operations, China domestic polyester plant operating rate was reduced in early Oct, but then has rebounded slightly and been hovering around 90%. The average operating rate of PTA plants in Nov was relatively little changed from the level in Oct. However, China domestic PX plant operating rate has increased notably in Nov. Shenghong cut PX plant operating rate on Oct 7 and recovered in early Nov, ZPC shut one line temporarily and restarted in early Nov, CNPC Sichuan restarted its 750kt/yr PX plant in mid-Nov after two months of maintenance. China PX plant operating rate rose to hit 85%, this year's new high, despite Weilian Chemical's maintenance on 1 million mt/yr PX line starting from Nov 6 and ending on Nov 19. As a result, China PX inventory increased by more than 200kt in Nov.

Outside China, PX supply has increased due to rise in operating rate especially in South Korea.

After gasoline blending demand weakened, toluene and MX prices have pulled back. With improvement in PX profits based on toluene and MX, several South Korean producers have raised PX plant operating rates. SK's 2.1 million mt/yr lines, SK/JX' 1 million mt/yr line and S-Oil's 1.8 million mt/yr lines are currently running at full swing. GS had postponed the restart of its 550kt/yr PX line for several times but eventually restarted it in late Nov. With plant operating rate rising to hit 80%, its exports to China are estimated to increase.

The increasing inventory weighs on discussions for PX. In late Nov, PX goods for Jan delivery were discussed at -$10/mt to Jan average, and Q1 goods were offered at -$1/mt. Buying sentiment was tepid amid uncertainty in term contract negotiation. Buying from PTA producers were cautious and some PTA supplier was heard selling PX in the market. Therefore, PX-naphtha spread hovers on the low side in the near term.