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November 29, 2018

Massive overcapacity looms heavily in the aromatics industry in 2019

While massive overcapacity looms heavily over the market outlook for 2019, the aromatics industry remained highly profitable in 2018.  Lower gasoline values have supported aromatics extraction economics in some regions, and the overall health of the market has been driven principally by very strong consumption growth in the PET fibre sector.  China’s ban on imports of PET scrap has also dropped the proportion of fibre coming from recycled PET (RPET).

The aromatics business has always had to manage the mismatch of the composition of BTX production and the consumption profile.  Far more toluene is produced in the conventional sources from the steam cracker and reformer than needed for chemical uses and the proportion of para-xylene produced is far lower than the demand profile of xylenes.  The growth of para-xylene remains much higher than that of benzene, and the conventional supply structure for aromatics has become unable to match the changing demand growth profile.  A new supply concept described as “crude-to-para-xylene” has emerged, whereby PET sector consumers are back‑integrating into para-xylene via world-scale refinery/aromatics complexes.  These projects use a novel configuration to maximise naphtha production and therefore allow several times more para-xylene production per ton of crude oil distilled, enabling new para-xylene complexes of up to four million tons of annual capacity.  Although tightly focussed on the production of para-xylene, these units will also bring excess benzene supply from toluene disproportionation (TDP), and motivate other producers to reduce their benzene make, notably by reducing TDP operations and removing benzene precursors from reformer feed.

China’s import requirement for para-xylene has soared to over one million tons per month, and almost all the margin in the polyester chain has become concentrated at the para-xylene step.  Very high consumption growth did however restore profitability of purified terephalic acid (PTA) in 2018, although PET resin and fibre producers were at time unable to pass this downstream.  As the main purpose of this unprecedented wave of capacity growth is to reduce the need for para-xylene purchasing by the major consumer groups, the effect on existing merchant suppliers of para-xylene to China will be pronounced.  The new producers will be motivated to run their own plants at maximum rates, irrespective of market conditions.  Many laggard operations in other countries are therefore expected to close.  Some aromatics complexes already operate in gasoline mode, maximising gasoline production and producing little or no marketable aromatics.  This is a choice for some other existing producers, although tight gasoline specifications in some regions particularly concerning benzene mean this is not an option for all reformer operators.

Benzene and para-xylene values will continue to be heavily influenced by gasoline values.  When the gasoline value is high relative to the market price of aromatics, refiners leave a higher proportion of mixed xylenes in the gasoline pool, and toluene conversion to benzene and para-xylene is also reduced.  Toluene conversion economics have become more attractive since 2016, but the expected severe oversupply of para-xylene is expected to put these under pressure again.  The large increment of benzene supply from new liquid-based steam crackers will also contribute to benzene oversupply, undermining both hydrodealkylation (HDA) and TDP economics.

The effect of the new capacity in China is expected to be a severe fall in global operating rates for para-xylene, and significant pressure on benzene.  This is reminiscent of the market dynamics from massive capacity builds in 1989/90 and 1998/99.  As the new plants will be fully refinery integrated and benefit from low Chinese construction and fixed operational costs, they may well run at high rates forcing produces elsewhere to cut back.  Margins for para‑xylene extraction from mixed xylenes have frequently been close to zero in recent years, while most of the margin has been achieved in reforming.  Access to mixed xylenes and other integration benefits will be key from 2018 to 2020 as margins decline, and will define which of the existing para-xylene producers are forced to exit the market.

The scale of the capacity build now underway in China is sufficient to significantly alter the global market.  As margins currently remain strong, the main effect in the short term is on investment plans, which have cooled, particularly in the Middle East. 

Despite relatively low average operating rates, the global benzene market is deceptively tight.  Nameplate capacity reflects the capacity for benzene extraction, although benzene production is frequently restricted well below this level due to lack of feedstock.  This is particularly true in the United States where the availability of pygas has dropped due to the shift to lighter steam cracker feeds, and in China where capacity for benzene extraction from coke oven light oil (COLO) was overbuilt, and the supply of COLO has declined due to the closure of coke ovens and modernising steel production which requires less coke per ton of metal produced.

The drop in crude oil prices in 2014 was the main influence leading to a drop in investment in coal-based methanol to olefins (MTO) in China.  MTO brings olefins supply without incremental benzene from pygas.  The project pipeline has thinned since the fall in oil prices, but capacity growth could accelerate again if crude oil prices remain high.

So once again the aromatics business will face mismatch between supply and market demand and will be forced to rationalise, adjust production and conversion, and attempt to remain profitable through the coming years of over-supply.

Find out more in our recently published report:

Market Analytics: Aromatics - 2018

Author:

Stewart Hardy, Senior Consultant