Contract price tops charts as supply shortfall emerges
Gordon Graff -- Purchasing, 4/1/2004 2:00:00 AM
A healthy demand for benzene, coupled with extremely short supplies, pushed contract prices of this aromatic feedstock in March to $2.00/gal—the highest level since the Gulf War of 1991. While industry observers predict that benzene tags may ease as the year progresses, they say that rates in the coming months are unlikely to return to their long-term average.
SUPPLY: Asian exports drop
Benzene inventory in North America is "acutely tight," says Chuck Venezia, vice president of benzene and derivatives for DeWitt & Co., Houston, Texas. While the U.S. has traditionally imported benzene from Asia to make up for deficits in its domestic production, this option is disappearing, Venezia notes. The reason, he explains, is that Asian producers have over the past few years installed new capacity at home to consume their locally produced benzene, so there is little left to export.
Another factor constraining benzene supplies is dwindling production of pygas (pyrolysis gasoline), a byproduct of ethylene production that is a major source of benzene. "A lot of new ethylene capacity has moved to the Middle East," says Alex Lidback, global practice leader for aromatics at Chemical Market Associates (CMAI), Houston. These new olefin units, he notes, typically use light feedstocks based on natural gas, that produce far less of the benzene-rich pygas than facilities that use heavier naphtha-based feedstocks.
Also putting a crimp on benzene stocks, say industry observers, is the lack of any new refinery capacity in the U.S. in recent years. (Refineries make benzene by the catalytic reforming of naphtha, a process that also produces toluene and xylenes as co-products.) Moreover, notes Lidback, toluene, which can be converted into benzene, is increasingly being diverted by refiners into the gasoline pool in order to boost octane ratings, especially now that the additive MTBE is being phased out for environmental reasons.
DEMAND: Robust sales
Benzene consumption tends to grow at GDP rates, notes Venezia. "We had a fairly robust demand" for benzene during the second half of 2003," he says. That paralleled growth of the world economy during that period, he says, and particularly a ramp-up in demand for benzene derivatives.
Global consumption of benzene grew about 3% in 2003, according to Lidback. While demand in 2002 grew 6.5% over the previous year, that figure, he says, reflects a rebound from the dismal showing in 2001, when benzene demand plummeted 3.3% from the year before. Over the 1998-2003 period, the average annual benzene growth rate was 4%, Lidback reports. He predicts that benzene will also expand at this rate through 2008.
The leading derivatives of benzene are ethylbenzene, cumene and cyclohexane. According to SRI International, these three products accounted for more than 88% of benzene consumed in 2002 in North America, Western Europe and Japan.
In the U.S., there is a widening gap between benzene consumption and production. Benzene consumption is expanding at 3.1% annually, while production is growing by only 1.8%, Venezia reports. "Over the long term, this is not a tenable situation," he says. But two developments may come to the rescue over the next few years, he believes. First, ethylene crackers along the Gulf Coast may find it economical to make ethylene (and pygas) from heavy feedstocks as they become less expensive than light feeds. Second, he foresees a growing demand for ethylene co-products, namely propylene and butadiene, which may also encourage heavier feed slates in olefin crackers.
PRICING: No relief in sight
After reaching record-high levels in March, benzene prices will probably retreat somewhat during the second half of the year, says Lidback. But tags in the U.S. will likely remain above their historical mean levels "for the foreseeable future," says Venezia, unless new capacity comes online.
Pricing of benzene is becoming increasingly globalized, notes Venezia. In the past, he says, benzene prices varied considerably between North America, Western Europe and Asia. In the U.S., which is typically short in benzene, it made sense to import cheap benzene from Asia. But now that Asia has little excess benzene left to export, benzene prices in the U.S. have gradually risen. As a result, Venezia says, Asian benzene producers have had to raise their tags to approximately the U.S. levels "in order to keep their barrels of benzene at home."
Benzene tags are also likely to become more volatile, predicts Lidback. The reason for this, he says, is that large consumers of benzene, such as the U.S., will be forced to scramble for new benzene suppliers as inexpensive Asian imports dry up. And most benzene consumers, he adds, are now working with less and less inventories in order to preserve their capital. Because of low inventories, Lidback explains, "if there's a benzene supply disruption from one of these foreign suppliers, it has an effect on the North American market.
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