Despite weak demand for benzene, prices remain firm and are expected to climb slightly in the first quarter of 2003. Higher crude oil tags are contributing significant supply-side price pressure. In addition, the possibility of supply disruption is fueling price strength even in a slow-growth market.

Order levels have been expanding modestly this year. Benzene demand is up 14% in 2002, after slipping 19% in 2001, says Chuck Venezia, vice president-benzene and derivatives, DeWitt & Co., Houston, Texas. Venezia attributes much of the activity in the first half of 2002 to inventory rebuilding. However, he says there also have been improvements in markets such as automotive and housing.

Though certain markets have turned around, benzene "demand is softening," says Alex Lidback, director—benzene and styrenics, Chemical Market Associates Inc. (CMAI), Houston, Texas. He says the markets for benzene derivatives and their downstream products have been weak. He notes that "styrene monomer exports have slowed down" and polystyrene use has dropped. A breakdown at a phenol plant this fall also stalled demand for cumene.

Overall, analysts don't expect benzene demand to increase in the next six months. Fourth quarter activity usually is low and the economy has shown signs of strength only in fits and starts.

Benzene prices are down after peaking this summer, but don't look for further softening in the first quarter of 2003. Instead, buyers are likely to see prices stay where they are or rise slightly until cyclical crude oil price increases begin to affect benzene near the second quarter.

Tags rallied this summer, up to $1.87/gallon, according to one analyst. Venezia says that by mid-summer benzene prices finally began to reflect 2002's slightly higher demand. In addition, domestic benzene availability was drained when Shell Chemical's Deer Park, Texas-plant had problems in July. One source says European benzene suppliers also had operating difficulties at that time.

Since then, benzene prices have fallen, though not far. PURCHASING's surveyed readers reported a high this year of $1.49/gallon in August, and tags are now around $1.35/gallon. Buyers expect prices to be higher in the next three months.

They're not alone. Says Venezia, "In the next six months we see continued volatility based on lower import volume and uncertainty of crude oil prices." Imports are causing a new problem, say analysts. Venezia points out that past reliable trading partners such as Brazil and the Caribbean have been sending benzene elsewhere due to the lower prices in the U.S. market. "Since the U.S. is net short on benzene," Venezia says, suppliers such as Saudi Arabia have stepped in. However, with conflict in the Middle East a possibility, benzene supply is not completely predictable.

In addition, Lidback notes that with political tension high in the Middle East, crude oil prices currently feature a "war premium." This could undo the usually lower prices for benzene that exist in the early months of the year until feedstock crude oil tags increase near the second quarter.

In addition to the likelihood that feedstock costs will push benzene prices upward, supply also could tighten in coming months, says Venezia, as "competition for foreign barrels" intensifies.

Currently, supply levels are comfortable, says Lidback. PURCHASING's surveyed buyers also say supply is readily available. Most purchasing managers report leadtimes between 2-5 weeks. The overall leadtime average is 7.2 weeks, much shorter than the 11.6 weeks purchasing managers faced recently. However, if demand doesn't pick up, and prices don't rise, importers may be even less likely to send benzene to the U.S., says Lidback.