The CFR China toluene price Wednesday was pegged at a discount to the East China domestic price for the third consecutive day as sources said China buyers now preferred buying cargoes on a domestic price basis rather than importing as they see greater risks associated with cargoes from overseas.
This has created the unusual situation where the CFR China price is now lower than the domestic price on an import parity basis.
Large incoming volumes and a weak outlook for toluene prices in the year end has resulted in few buyers willing to take the risk of purchasing imported cargoes that require a longer delivery time as the cargo has to travel from South Korea to China, the sources said, adding that buyers now preferred domestic cargoes, where delivery can take place almost immediately.
Tighter credit availability has also made it harder for those who wish to import cargoes to open letters of credit.
The CFR China L/C 90 days marker was pegged at $1,103.50/mt, against the domestic price of Yuan 8,775/mt or $1,107.56/mt on an import parity basis, putting import prices at a discount of minus $4.06/mt to domestic prices.
The spread has been fluctuating between positive and negative territory over the past two weeks. But prior to that, the CFR China was typically at a premium to domestic prices. On October 3, the premium was $4/mt.
The domestic price in China has been relatively firm over the past two weeks, with prices heard above Yuan 8,700/mt consistently. And market participants said this was due to the relatively low inventory situation in East China, with the inventory heard at 35,000 mt last Friday, down 41.67% on the week.
SHIFT IN BUYING PATTERN
Chinese market sources attributed the shift in buying patterns to an influx of cargoes arriving in China in November, poor outlook for toluene prices in November and December, and a tighter credit environment.
Traders estimate that at least 30,000 mt of toluene will arrive in China in November, which will more than compensate for the tight inventory situation now.
"More than 20 spot deals were done [for November delivery]," said a trader. Toluene typically trades in cargo sizes of 2,000 mt, putting the influx of cargoes at potentially 40,000 mt.
This, along with the poor global economic environment, has resulted in a poor near term outlook for Chinese toluene prices.
"Everyone feels the November and December outlook is not so good.The backwardation is steep," said a Shanghai-based trader, who added that domestic production is also expected to increase at the year end.
Another trader added that with the domestic toluene price on a potential downtrend "after CFR cargo arrives, documents are presented and customs cleared" the CFR price could well be above the domestic price.
Besides, CFR buyers will have another hurdle to surmount -- tougher credit conditions. According to another Chinese trader based in Shanghai, the deposit to open a letter of credit has increased from 20% to more than 30% at present.
"It is hard to open an L/C," he said.
HIGH FOB KOREA PRICES MAKE IMPORTS UNATTRACTIVE
Meanwhile, importing toluene from Asia's largest producer South Korea will mean buyers on a CFR China basis will have to absorb present FOB Korea prices, which Chinese market players consider relatively high.
"Many people needed to cover shorts on the FOB market, so the FOB price went up," said a China-based trader.
The H1 November FOB Korea price was assessed at $1,099/mt on Tuesday, down $2/mt on the day.
