US styrene production costs appeared poised to rise to kick off the new year amid higher feedstock benzene prices and anticipated gains in North American January benzene contracts, market sources said Monday.
December benzene contracts were settled at 231 cents/gal, up 8 cents from the previous month. Since the December contracts settlement, spot pricing has gradually marched higher and January was heard traded multiple times in the low-250's cents/gal range.
Market participants have noted that even though demand from the styrene segment remains soft, supply-side tightness has lent support to pricing. The tightness stemmed from decreased imports from South Korea, beginning in October. For the first three quarters of 2019, US imports from Korea have averaged roughly just over 84,000 mt. That number roughly halved in October and November with import volumes at about 38,425 mt and 47,400 mt, respectively.
December volumes look to be sparse as well, with 9,000 mt shipped during the first 10 days of the month. Additionally, imports will likely be seen from places like Europe, Latin America and Canada, however, those volumes are unlikely to be significant enough to offset the reduction from Asia.
STDP MARGINS TIGHTEN BENZENE
The US benzene market has seen further supply-side constraints from reduced output from toluene conversion units. Selective toluene disproportionation, or STDP, margins have been largely negative since the beginning of the second quarter on the back of stronger toluene and softer benzene and paraxylene pricing, S&P Global Platts data showed. Paraxylene prices have been negatively impacted by new capacities coming online in China. Over 8 million mt of new paraxylene production is expected with the start up of the Zhejiang and Hengli refineries. With paraxylene soft and economics poor, STDP unit operators were running at nominal rates, sources said.
Sources have noted that US styrene margins have been razor thin with production costs estimated anywhere from $760-$790/mt FOB USG and Platts estimates at $785/mt. US prompt spot styrene prices closed Friday at $795/mt FOB USG and have averaged $784/mt for the first 15 days of December.
When looking at the monthly contract formula, which incorporates feedstocks, natural gas and an adder, margins turn sharply negative with contract costs estimated at near $867/mt. Platts estimates put losses for formula-based sellers at near $158,000 for every 5,000 mt sold. Those selling on a benzene plus adder basis are facing even more dire circumstances. Considering an adder of $325, benzene plus sellers could be losing as much as a half million dollars on every 5,000 mt and possibly more, sources said. Platts estimates show a loss of near $615,000 per every 5,000 mt sold.
There are multiple reasons to expect that styrene will improve in 2020. As previously mentioned, January benzene contracts are poised to move higher and those costs are expected to be passed on. Additionally, the styrene maintenance schedule is relatively heavy in Q1 2020, with two producers expected to undergo maintenance. This, coupled with previous run-rate cuts, is likely to further tighten the market, sources have said.
The primary question mark remains about demand from derivative segments as well as other regions. An agreement reached between the US and China last week to halt the escalation of tariffs was promising though it was far from a resolution. Other factors worthy of consideration relate to new styrene capacities expected in China as new crude-to-chemicals refineries could theoretically bring as much as 2 million mt online.
