High benzene tags will affect downstream products' costs
Jason Seigel -- Purchasing, 7/15/2004 2:00:00 AM
Benzene, the aromatic compound used to produce other chemicals and resins, has grown costly in recent months—and could get even pricier soon. Analysts suggest that until raw material prices decrease and production levels increase in the U.S. and abroad, benzene's spot-market price will remain elevated.
Average spot price reported by Purchasingdata.com has risen to $2.38/gal in May 2004, an 88.9% increase since $1.26/gal in May 2003. In fact, benzene's price stability of an average $1.52 from August to December 2003 yielded to an average monthly increase of more than 13¢/gal since January 2004. U.S. crude oil's recent peak at the highest level in 21 years of oil futures trading in New York bodes poorly for any price decline-or even stability in spot benzene purchasing. "It looks like it's a structural issue with benzene, and this is the tip of the iceberg really," says Jenny Bouch, group manager of the Jacobs Consultancy in Croydon, England.
The five mechanisms of global benzene production that can potentially lessen current market tightness each have potential pitfalls that can-and have-contributed to benzene's all-time price high. Benzene from refineries, which accounts for about 50% of the U.S. supply, is a byproduct of crude oil reformation. Naphtha reformation can produce either a high-octane gasoline blend stock or aromatic chemicals like benzene. Chemical plants' steam crackers produce ethylene and propylene to make monomers for plastics manufacture and also produce raw material for benzene extraction. The plants convert pygas (pyrolysis gasoline) to benzene.
Either way, benzene is always produced as a byproduct, Bouch explains. Reformate and pygas, taken together, are the largest source of benzene, accounting for about 70% of world benzene production. Two other sources of benzene rely on toluene feedstock conversion: TDA (toluene dealcolation) and TDP (toluene disproportionation) are the third and fourth largest sources of benzene production, together accounting for about 25% of world benzene supply. Like benzene, toluene is a byproduct of pygas from steam crackers. The final 5% of global benzene supply comes from coal, used in regions with access to benzene, according to Bouch.
All the raw materials that figure into benzene production are increasing in price. Crude oil prices loiter between $35 and $40 per barrel. The price of natural gasoline—the largest source of benzene in the U.S. according to one benzene market analyst—continues to rise, as does the price of toluene. Not only are feedstock costs "prohibitively high," according to Jim Stone, an aromatics consultant for Dewitt & Co. in London, but gasoline demand is at a very low growth rate of 1.2%. "Set that against benzene growth at 4% per annum," says Bouch, to see that "demand for benzene is growing faster than byproduct supply."
Benzene's tight supply cannot meet demand. The aromatic is widely traded and stockpiled, especially due to today's high prices, so purchasing is sporadic. Buyers are reluctant to enter contracts that reflect recent high pricing, instead electing to buy spot. Spot buying fails to guarantee future business to refineries and chemical plants, making these producers, in turn, equally sporadic in the quantity of benzene they bring to market. Spot purchasing, therefore, yields price volatility. A market analyst explains that when buyers elect to buy spot, "prices will be all over the place (so that) the guy who buys spot at the beginning of the month may spend 20% more than the guy (who buys) at the end of the month."
Benzene purchasing is unsteady and supply is fair-weather. "People build benzene plants when times are good, ensuring that a time will come when prices are bad," an analyst explains. Yet the North American petrochemical industry has been reluctant to invest capital in benzene because of the chemical's poor track record: "For the last 10 years benzene prices have been very depressed and there was no investment in new production capacity," according to market analyst Chuck Venezia, Dewitt & Co.'s vice president of benzene and derivatives. During the same years "benzene production grew at 1%-1.5% but consumption capacity grew at about 3%; that's not a sustainable situation," Venezia explains.
It's more than just crude at fault
While most experts cite high crude oil prices as the primary cause of benzene price volatility, this is not necessarily true. The domestic benzene market may actually have rid itself of the "energy influence," or high price carried over by the high price of raw materials, according to Daphne Tan, senior editor of ICIS-LOR in Houston. According to Venezia, "the idea that benzene is tied to crude oil price is violated" because benzene prices have continued to rise while raw materials prices have plateaued.
Another culprit behind benzene's high, volatile price is the operating margin of producers. "When the market is very tight, the margin becomes a larger component of the overall price," says Bouch. "The costs of supply have gone up, which increase the overall price, but a larger portion of the increased price is from the operating margin (reflecting) the tightness of supply."
Venezia concurs, saying, "When you have a volatile raw material like benzene, it takes a while for (price) increases to filter through the (supply) chain, and as a result, each link of the chain has their margin squeezed." Tight supply, itself, exacerbates already high benzene prices.
Problems at three major U.S. petrochemical complexes have limited further benzene supply: at the Exxon Mobil chemical plant in Baytown, Texas, a naptha processing unit exploded; at the Shell Chemicals plant in Deer Park, Texas, a cooling tower collapsed; at BP Texas City, Texas, there was a fire. According to one benzene market analyst, "the explosion was a major factor in that it brought forward what was in some parts inevitable"—the benzene supply crunch.
Due to low levels of domestic production, buyers look to import benzene. However, supply is tightening and prices are volatile on a global basis. Venezia explains, "For years and years, it was easy to import benzene to the U.S. The U.S. was net short maybe 600,000 tons of benzene a year, and it was easy to procure that in South America and Northwest Europe and even Asia, but now that these regions have developed their own consumption capacities," the U.S. must now compete for benzene with the same regions it used to import from. "Product has been coming in from Korea and Taiwan, but that hasn't been enough," says Tan.
The U.S. has the highest benzene costs globally, but the European market may be more volatile. European benzene is now trading at more than $900/metric ton. Stone explains, "Volatility has reappeared in the European market," which has "gone nuts" with sudden surges: thus far, June's benzene prices in Europe are 88 euros higher than May's. Stone explains that, at least in Europe, "Volatility seen in the basic energy complex…has to some extent had a collateral impact on the spot market as activity has been somewhat constrained with trade and industry having setbacks from the arena while waiting for spot prices to return."
Since benzene is a building block for all aromatics, price increases of several products can be expected, according to Venezia. The plastics, paints, and synthetic rubber for tires that contain styrene, the phenolic resins and polycarbonates that contain cumene (or, isopropyl benzene), nylon, the solvents that contain cyclohexane, and dyes and polyurethane that contain aniline will all increase in price. According to Bouch, "On the positive side, (benzene is) also a byproduct of paraxylene, and its demand is growing."
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