PX-naphtha spread approaches $300/mt supported by tight PX supply

PX price finds support from strong fundamentals, although the impact from geopolitical conflict diminishes. Amid tight spot supply, PX price becomes sensitive to the changes in terms of supply and demand.

From the perspective of PX and downstream production, the overall polyester plant operating rate in China still hovers high, regardless of several rounds of talks about production cuts. However, the production loss in PX is more obvious, owing to Zhongjin's unplanned cut, ENEOS' unexpectedly shutting units as well as the shutdowns of units in Iran and Israel due to the conflict. In addition, there was news on Jun 27 that some major PX supplier reduced contract volume. Moreover, the PX plants of Weilian Chemical and Fuhaichuang undergo maintenance as scheduled, also resulted in reduction of supply.

Demand from PTA is supportive to PX.

-Honggang has started its new 2.5 mln mt/yr PTA unit in Jun;

-Helen (Sanfame) is poised to start new 3.2 mln mt/yr PTA unit in Aug;

-And Dushan Energy (Xinfengming) is likely to start new 3 mln mt/yr PTA unit in Oct.

As a result, near-month PX supply further tightens, and Aug/Sep backwardation widening to $24mt, with traders and PTA plants continuing buying in PX spot market. Aug PX physicals are driven up to $28/mt premium to formula pricing and Sep goods to $10/mt premium. PX-naphtha price spread is also pushed up to this year's new high of $298/mt on Jun 27.

Whether PX-naphtha spread could break through and maintain above $300/mt depends on the situation of PX supply. PX supply remains tight with inventory decreasing, supportive to the spread.

It is also noteworthy that gasoline blending demand in Asia is picking up recently. In the latter half of second quarter, the economics of toluene and MX as blending components have recovered rapidly. Some PX unit in South Korea has been impacted and thus reduced operating rate. News say some more units may also cut run rate, but it has not been confirmed.

If gasoline blending demand sustains strong, PX units may get affected and turn to production cuts, because more toluene and MX could be allocated in gasoline blending pool instead of PX production.

However, there's also pressure coming from the sharp squeeze of PTA spot-futures basis recently, as well as compressed PTA processing spread which may cause PTA operating rate to decline. Additionally, though overall polyester plant operating rate remains above 90%, the product inventory is showing signs of increase. In Jul, polyester fiber inventory may further pile up during the slack demand season, and production cuts and operating rate reduction are likely. Then, some PTA plant may undergo maintenance with squeezed margin. But it still needs time to testify.