Commodities 2023: Global PX braces for greater volatility on new supply, demand uncertainties

Asian paraxylene market is likely to be driven by increasing supply from China and global arbitrage, especially to the US, on expectations of renewed gasoline seasonal demand in 2023.

However, Asian demand from the polyester supply chain remains uncertain.

More paraxylene capacities are set to come onstream in 2023, further lengthening the market and putting downward pressure on margins.

While a total of 5.6 million mt/year of new supply are expected in the last quarter of 2022, China will add another 6.2 million mt/year of paraxylene capacity in 2023, including Shenghong Group, CNOOC Ningbo Daxie Petrochemical and CNOOC Huizhou Petrochemical.

China's drive for self-sufficiency is likely to further reduce the country's reliance on imported cargoes and develop a domestic market. Over January-October 2022, China's paraxylene intake totaled at 8.92 million mt, falling 21.45% on the year.

Operating rates of Asian paraxylene producers are poised to stay low on expectation of increasing supply from China and squeezed margins. Plants with less competitive production costs may be forced to slash production or shut down for the long term for capacity rationalization.

Producers also expect a shortfall in contractual volumes in 2023, awaiting more opportunities in the spot market. Contractual discussions for the 2023 term contract have already been impacted, with the term contract still not settled within Asia at the time of publication and January cargoes moving to the spot market in the absence of a term contract.

In a significant move, China's Yisheng Petrochemicals will discontinue using the Asian Contract Price, or ACP, settlement mechanism in 2023 term contracts, with other market participants expected to follow. The ACP contract has been losing relevance over time, with monthly settlements few and far between.

While several market sources expect the backwardation structure to persist into 2023, tight supply may be offset by lackluster demand, which may dampen the paraxylene-naphtha spread.

The spread between CFR Taiwan/China PX and C+F Japan naphtha rose to a record high at $684.83/mt on July 28 and averaged at $324.50/mt over the first three quarters, amid an open arbitrage between Asia and the US and driven by strong demand for gasoline blending stocks.

While some of the market feels that gasoline blending demand will buoy Asian aromatics again in 2023, others feel that the lucrative paraxylene-naphtha spread from 2022 may not be repeated due to a bearish polyester demand outlook.

Although China has lately signaled an easing of COVID-19 policy following widespread protests, the uncertainty still hangs over China's demand recovery, as stringent COVID-19 regulations took a toll on downstream PTA and polyester sectors in H2 2022.

Market participants are also concerned about PTA operations in China in the face of capacity expansion and negative margins. While greater paraxylene demand is expected in 2023 due to downstream expansion, poor margins due to oversupply and concerns over global demand may post negative feedback to the upstream market and weigh on paraxylene prices, according to sources.

Two new plants slated to come online in 2023 by Yisheng are expected to add 3.25 million mt/year of PTA, while Hengli Group's planned new capacities could add 1.88 million mt/year, adding to oversupply fears amid a weak polyester demand.

Chinese buyers may procure less PTA from other regions, which could lead to a sharper-than-expected fall in imports. Exports of PTA are likely to increase, market sources said, as domestic polyester run rates are unlikely to be high, given lower consumer spending on inflation and a weak global economy.

Chinese PTA exports have risen for three consecutive years, China Customs Statistics data showed. In 2021, China exported a total of 2.57 million mt of PTA, while exports from January to September 2022 stood at 2.79 million mt, 8.2% higher than the previous year.

Northeast Asian exporters will face competitive pressure, as supply growth would lead to more competitive offers from China, as production margins remain narrow from weak demand and low operating rates.

PTA producers in Northeast Asia are also expected to join the spot trade flow to the US though surging freight costs remain a barrier.

European PX market fundamentals are set to remain challenging in H1 2023, with supply from upstream MX market, and the demand for downstream PET applications both impacting pricing. Spot market activity will be limited until Q1 at least, as PET buyers and sellers continue to reduce inventories amid low bottle and sheet demand.

Extended holidays and lower PET production run rates in early 2023 may put further downward pressure on PX prices, although they may be cushioned by low MX production. This uncertainty around fundamentals and pricing will impact contract negotiations, with market participants likely to resort to fallbacks or fail to reach settlements.

Sources remained unsure about the European PX market in 2023. "It's incredibly quiet on all things PX, and I expect it to remain that way. I don't have much [info that] I can confirm about 2023", said a trader.