PX Supply-Demand Rebalancing Under Way

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Asia PX contract price for August was settled at US$ 1060/mt between PTA and PX plants. In the beginning of August, PX market extended its strength and the price rose continuously.

From the chart below, PX-naphtha spread widened rapidly in early August, recording US$ 430/mt on August 1. However, the spread of PTA futures and PX narrowed to US$ 565/mt and that of PTA spots and PX maintained relatively stable at US$ 836/mt. It reflects that PX is currently at the dominating position, which is determined by its strong fundamentals. From the perspective of upstream naphtha, the spread of naphtha-Brent crude oil kept widening. It proves that it is tight PX supply rather than fluctuations of naphtha price that drives PX-naphtha spread higher. Then, what's the reason for the strength of PX? As we all know, China's domestic PX inventory has been reducing since the second quarter. In July, PX inventory to demand ratio dropped to 1, and the ratio could fall further below 1 in August. PX stocks see a low level in more than two years, and the market enters a cycle of boom. Comparatively speaking, the boom of PX is belated, as polyester market has already been in boom cycle since the last quarter of 2016. As shown in the chart below, the inventory of POY, FDY and DTY dropped to bottom in Q4 2016. In addition, PTA market started its boom in the third quarter of 2017, & the good performance continued up to now.

PX market is expected to embrace its boom cycle from August, and the sustainability depends on the startups of new plants. The reason behind the cycle is that strength in polyester is fed to PTA and further to PX. Polyester output grew 4.3 million tons in 2017, and it may post higher growth in 2018. It is estimated that the increase in polyester production this year could consume 2.41 million tons of PX.

However, Petro Rabigh's 1.34 million mt/yr PX plant in Saudi Arabia is unstable, and the operating rate of NSRP's 700kt/yr PX plant in Vietnam is not high. The growth of supply could not meet the demand for additional feedstock PX. The bull of PX market could sustain for a longer period if Fuhaichuang (formerly known as Dragon Aromatics) does not restart its PX plant and Hengli Petrochemical does not operate its refinery as expected.

However, PX supply and demand will gradually balance, and the process has started. PetroChina Sichuan restarted its 650kt/yr PX plant in late July. Hengli Petrochemical shut its PTA plant for maintenance. In addition, Sinopec Jinling delayed the maintenance of its PX plant, and CNOOC Huizhou even cancelled the maintenance for 2018. PX market is adjusting both on supply and demand side. However, PX will not turn weak unless there's fresh supply into the industry.

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