CMAI: Benzene markets to remain tight through 2007

March 21, 2005
After experiencing a year of record high prices in 2004, the global benzene market will remain in a tight supply-demand balance through 2007, according to a recent study from Chemical Market Associates Inc. (CMAI), Houston.

After experiencing a year of record high prices in 2004, the global benzene market will remain in a tight supply-demand balance through 2007, according to a recent study from Chemical Market Associates Inc. (CMAI), Houston.

"The past 10 years or so [have] been 7 years of famine and a couple of years of feast in terms of profitability for making benzene," according to Simon Palmer, Director, Aromatics for CMAI, and the study's author. "And that's been the problem—there hasn't been much of a reward to the producers during most of the last 10 years.

Essentially, there has been little incentive to build new equipment and capacity growth has lagged demand growth."

This supply-demand imbalance has caused operating rates to climb, although this effect went largely unnoticed because most plants were operating at fairly low rates. Recently, however, the operating rate has risen to nearly full operational capacity, according to Palmer. "Benzene operating rates in 2004 were about 83-84%," he said. "Full capacity is probablyUabout 85-87%. Units are running pretty much to their practical capacity."

The benzene study also concluded that:

  • Demand growth is stable but shifting regionally.
  • Capacity growth is increasing but lagging demand.
  • Fundamentals will remain tight until at least 2007.
  • Investment has occurred mainly in Asia and the Middle East.
  • International trade flows are changing.
  • Global "swing" capacity is all but gone.
  • "Defensive" investments could potentially occur.
  • Regional pricing is more independent and short term in nature.

Demand growth

Fig. 1 shows the worldwide capacity and demand for benzene.

Click here to enlarge image

Worldwide demand for benzene will increase to nearly 43 million tonnes in 2009 from about 36 million tonnes in 2004. Demand will grow at an average 3.6 %/year in 2004-09, which is the same rate at which it grew in 1999-2004.

Benzene demand "actually had negative growth in 2001. Basically benzene demand grows roughly at GDP type levels," Palmer said. "It is growing at a relatively steady rate. Nearly 1.5 million tonnes/year of additional demand."

The markets that use benzene are also growing at a steady rate. In 2004, 54% of benzene was used for manufacturing ethylbenzene and styrene monomer, 18% for cumene, 12% for cyclohexane, and 7% for nitrobenzene. In 2009, according to the study, ethylbenzene and styrene monomer will again use 54% of worldwide benzene, cumene will grow to 18.5%, cyclohexane will decline to 11.5%, and nitrobenzene will increase to 7.5%.

"One of the fastest growing segments for benzene is aniline" of which nitrobenzene is the precursor, according to Palmer. "It is growing at a good clip, about 5.5-6%/year."

Capacity growth

The global capacity to supply benzene will grow to 49 million tonnes in 2009 from 43 million tonnes in 2004. Capacity will grow at an average 3.1%/year in 2004-09, an increase from an average growth of 1.7%/year in 1999-2004.

In 2004, 37% of benzene came from refinery-based reformate, 38% was from pyrolysis gasoline derived from petrochemical steam cracker operations, 7% was from toluene disproportionation, 6% from hydrodealkylation, and 3.5% from coke ovens in steel smelting operations. In 2009, the reformate will increase to 39%, pygas will fall to 37%, disproportionation will decrease to 6%, hydrodeaklylation will fall to 5%, and coke will fall to 3%.

"Most produced benzene is a byproduct or coproduct, not as a primary reason for running that unit," Palmer said. "So how much benzene is produced is not always a function of how profitable the benzene business is."

Supply-demand imbalance

The drop in demand in 2001 helped the market "continue to steadily get out of kilter," according to Palmer.

Because benzene is often a coproduct or byproduct from other operations, the capacity to produce benzene is a function of other factors rather than just the supply and demand of benzene itself. According to the study, capacity growth has lagged demand growth and operating rates have increased to a level where they have caused the market become very tight.

"The market is tight enough that we've seen prices break way above historical levels," according to Palmer. Operators "are considering whether they want to build additional benzene production units to bring the market back into some kind of balance."

Most potential benzene production units, however, take a few years to get online. Based on currently announced projects, the market may stay tight through 2009 depending on the potential for additional projects.

"We think there will be more projects announced," Palmer said. "It is just a question of what those projects will be, where they are going to be, and what type of process."

The study also concluded that the ability of benzene producers to react to rising demand has declined during the past few years. Ten years ago, there were many benzene-producing hydrodealkylation plants that could be switched on and off, which helped balance the market.

In the late 1990s and early 2000s, "many of these units, most in the US, got shut down or they found ways to run economically all the time," according to Palmer. "So now when the market is out of balance, there isn't a mechanism to quickly bring it back into balance, and that's why last year we saw prices more than double. They started the year just above $1.70/gal and peaked out at $4.27/gal."

Although operating rates in 2004 were about 83-84%, Palmer noted that these numbers represented nearly maximum capacity, which is about 85-87%.

The number seems comparatively low, Palmer said, because the capacity to produce an aromatic hydrocarbonU is historically expressed as the capacity of a particular train to separate the product. Capacity to separate does not necessarily reflect the capability to supply feed or the capacity of the extraction or reactor section of the complex. Separation capacity is usually oversized to absorb variability in the feed stream and is rarely run to its full potential on a sustainable basis.

"Our view is that 85% of global capacity [was] the sustainable working maximum capacity for the past decade or so," he said. "We feel that that ceiling has risen somewhat above 85% because producers have learned ways to further optimize their operations, to run their plants even better, to process more feedstock through the system, to generally run them harder."

New plants, trade shifts

Palmer feels that many benzene consumers could potentially make "defensive" investments—either by acquiring existing assets, restarting idled assets, or building new plants—in the next few years to alleviate their exposure to potential price spikes.

Click here to enlarge image

Fig. 2 shows that benzene capacity is built in cycles and that most new capacity will be built in Asia and the Middle East in 2005-09.

"So you have a shift in production capacity growth from the Atlantic Basin to Asia and regions adjacent to Asia," Palmer said. "This is, in part, causing a change in the flow of benzene around the world.

"In the last few years, North America has been a big importer and Europe and Asia have been net exporters," he said. In 2003, "Europe moved to being a net importer and [in 2004], Asia moved closer to being in a more balanced position. The flow of products around the world is changing, which is contributing to significant price volatility."

North America

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Fig. 3 shows benzene supply and demand for North America. Demand will increase to an average growth rate of 1.5%/year in 2004-09, from 0.7%/year in 1999-2004. Capacity will experience a slower increase, an average rate of 0.6%/year in 2004-09, up from an average decline of 0.7%/year in 1999-2004.

"We've seen no capacity growth in the US since 1997," Palmer said. "In 2000, there was close to 10.5 million tonnes of capacity and now there is just over 9.5 million tonnes. We've lost over 1 million tonnes of capacity that existed in 2000 and capacity creep elsewhere has been modest. And in the meantime, demand has gone up."

These changes in the benzene market are, in part, a result of changes in the US refining industry. Due to large increases in gasoline demand and lesser refining capacity increases, refiners need to retain more aromatic hydrocarbons in the gasoline pool and release it less freely for extraction for sale into the chemicals markets.

"North America, as an aromatics production center, has hit upon this constraint, and it is most obvious in benzene because it is one of the largest of the aromatics markets," Palmer said. "Further reductions in the baseline production of benzene in the US are possible despite the strong margins producers are enjoying today."

Benzene operating rates "are occasionally getting precariously close to 90% and we don't think the market is capable of sustaining that level," he said. "Somebody is going to have to consider putting some money on the ground to make [benzene] on purpose. And it could be a consumer that does that. Otherwise the operating rates could potentially become unviable."

Pricing mechanisms

The study also concluded that pricing mechanisms are changing. Because the US, Europe, and Asia are becoming either balanced or short of benzene, they are each developing their own pricing mechanisms. In the past, the US Gulf Coast largely set the global price of benzene.

Europe had a quarterly contract price for many years, which moved to monthly in 2004. And operators are attempting to develop an Asian pricing mechanism to reflect local market conditions.

"Pricing is also becoming more short term, such as Europe moving to monthly contract pricing," Palmer said. "In the US, we've seen a migration of some business from flat monthly contract pricing to a weekly or even daily pricing because the market perceives a need to be more responsive to short-term variations in price."

Although North America still has the biggest spot market, all regions are now significant in that no one region dominates global demand, according to Palmer.

Because "the US has the most active spot market, it does tend to be watched by everybody around the rest of the world as a price-setting market" he said. "One thing that won't change through all this, however, is the significant price volatility."