PX-naphtha spread sustains high, a boom cycle for PX?

The fast capacity startup cycle for PX since 2019 in China has come to an end gradually after CNOOC Huizhou Phase II started its new 1.5 million mt/yr PX plant in Jun 2023. During this cycle, global PX capacity increased by as much as 28.25 million mt/yr (including new capacity startups and expansion of old capacity), and Chinese mainland accounted for 95% of the increase. Global PX capacity growth rate averaged 9% on annual basis, and that in China was as high as 25%.

With the huge capacity increase and the enhancing rate of self-sufficiency in domestic market in China, the world's largest PX consumer, PX market experienced a downturn cycle, with PX-naphtha spread declining to below $200/mt in average in 2020, down by a whopping 56% from the average level in 2018.

From the chart above, since 2022, the annual average PX-naphtha spread has seen an obvious rebound. In the first half of 2023, the spread further widened by 30% from the level in last year, averaging nearly $390/mt in H1 2023, exceeding the level in 2019. From the perspective of processing spread, PX seems to have entered a new round of boom cycle.

In terms of plant operating rate, however, despite the improvement in PX-naphtha processing spread, the average operating rate of PX plants barely increased. In 2022-2023, the operating rate of Asian PX plants (including China) is expected to average 70-71%, down 10 percentage points from 2018. However, as China's PX plant operating rate is estimated to average above 80% in 2023, it indicates that Asian PX plant operating rate outside China is obviously low. According to some assessment that plant operating rate below 75% reflects severe overcapacity, PX capacity is much more than what can be consumed. And therefore, PX seems to be still in the downturn cycle.

In terms of PX production based on TDP or based on merchant MX, the economics remain poor. During this capacity increase cycle, PX-MX spread averaged only $60/mt in 2022, down sharply by 75% from 2018. Though the spread widened slightly in the first half of 2023, it was only $70/mt, and averaged 700yuan/mt based on domestic yuan MX. As for TDP unit, the processing spread was $155/mt or 807yuan/mt, relatively low in recent years. The current price spread is also on the low side during the capacity increase cycle.

In a conclusion, the rebound in PX-naphtha spread does not necessarily mean a boom cycle for PX. It was because that due to the improvement in gasoline blending demand since 2022, feedstock availability to PX plants has tightened and with PX-MX spread squeezing, the average operating rate has dropped. For PX industry, it would still take time to ease the impact from recent years' huge capacity growth. If gasoline blending demand dwindles, toluene and MX prices would fall back, and then economics of PX based on toluene and MX would improve, leading to increasing supply.

In the medium run, new PX capacity in this round has all started, and it gives a respite before future projects make progress. Meanwhile, downstream PTA and polyester capacity is expected to continue increasing. And therefore, from this perspective, the downturn cycle for PX is coming to an end.