PX futures contract price drops rapidly amid abundant inventory

PX futures on Zhengzhou Commodity Exchange have been declining persistently since Mar 1, and the drop accelerated on Mar 4, with the structure between May and Sep contracts flipping from backwardation to contango. The downward trend in May PX futures seems to continue. At the same time, SGX PX contracts also weakened, with May/Sep timespread trade concluded at $14/mt or $15/mt last week but down to $4/mt on May 5.

The drop in PX price is attributed to oversupply. Since Oct 2023, Asian PX plant operating rate has been hovering high in recent years. The operating rate approached 82% in Chinese mainland, and reached 76% across Asia. In addition, benzene margins were attractive, incentivizing TDP units to keep high operating rates, which also led to increase in PX production. Meanwhile, downstream PTA plant operating rate did not catch up with the rise. As a result, China PX inventory has risen by more than 750kt since Oct 2023, up by 500kt from the same period of the year earlier.

In recent years, gasoline blending demand has become a strong driving force to PX. Due to the demand peak, more aromatics materials would be used in gasoline pool and Asia would increase the exports of toluene and MX to the US to sate the demand for gasoline blending components. And therefore, PX plant operating rates in Asia could be affected by reduced availability of feedstock.

Beginning from mid-Jan, there have been traders buying Feb and Mar toluene and MX to export to the US. Before Lunar New Year holiday, there was even some trader from Singapore saying that South Korea would load 160kt of aromatics in end-Feb and Mar destined for US. As a result, PX spot price on formula pricing basis rebounded and timespread of paper goods strengthened in tandem.

Afterwards, however, South Korea's export statistics showed the country exported 34kt of toluene to the US in Feb, down 14kt on year, and did not export MX to the US, compared to 19kt in the same period of last year. It dashed the expectation of gasoline blending demand. Even if the exports increase in Mar, there's still a doubt whether it would affect PX operating rate.

The continuous inventory rise brings about heavy pressure on PX market. The operating rate of downstream polyester plants recovers slowly, PTA spot-futures basis keeps weakening, and PTA-PX processing spread gets squeezed. Consequently, it is difficult to sell PX spot, and discussion for spots is at large discount to formula price though PX inventory is anticipated to reduce in Apr-May. After the discount on Mar goods became larger to $30/mt, discount on Apr goods enlarged to $15/mt and discount on May goods moved from $5/mt to the current $8/mt.

China PX plant operating rate is anticipated to stay high in Mar, with suppliers under strains from increasing inventory. However, after Lunar New Year holiday, China's gasoline consumption has fallen back. MX market is lackluster, and PX economics based on MX remain positive. Therefore, either because of the intention to diversify sales methods or for the sake of hedging, selling PX futures contracts become an option for suppliers.

In addition, after the launch of PX futures, the enthusiasm of some domestic traders or large enterprises with asset management background to participate in spot PX market has also been significantly improved, and it is heard that some enterprises have also participated in the spot trading of PX in a small amount this year and have a certain spot stocks. But the stalemate in the trading in the spot market this year has forced companies to choose futures as a way to outlet goods.

From the investigation of current situation, some of the delivery warehouses in East China are now reaching the maximum storage capacity, and the market has ample liquidity.

In a conclusion, the spot stocks continue to accumulate, the market supply is abundant, but the spot sales are difficult, there is a substantial discount, and there's activity in futures hedging, and therefore, some investors with bearish view are heard delivering goods of May contracts. But for players with bullish view, there would be great pressure as PX trading atmosphere is relatively insipid, buying from downstream PTA plants is slow, and PX warehousing costs are relatively high, if the delivery is really carried out.

Therefore, similar to the change in the role of PX spot buyers and sellers this year, the long-short operation of the futures market has also begun to change significantly in recent days, leading to the rapid collapse of May futures contract price recently. In the future, we need to pay attention to any improvement in PTA processing spread, as well as the willingness of the PTA plants to buy PX in the futures market.