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Insight | Time: Oct 29 2020 1:24PM
Could the recovery of PX-naphtha spread last long?
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PX-naphtha spread rebounded in Oct, widening from $122/mt on Oct 9 to $165.5/mt as of Oct 28.

1. Decline in naphtha
Naphtha price had been firm, but weakened recently. Demand for refined oil products ebbed due to the second wave of coronavirus pandemic, while deep-sea supply to Asia increased. In addition, some naphtha-based steam crackers in South Korea underwent maintenance, leading to lower demand for naphtha. The spread of naphtha to Brent crude oil futures narrowed from the high point of $91.5/mt on Oct 9 to $68/mt as of Oct 27.

2. Improvement in market sentiment
Order to textile producers in China picked up faster than expected in Oct. Due to the on-line shipping carnival on Chinese Singles’Day on Nov 11 and the transfer of orders to China, sales of polyester products improved markedly. Amid stronger bullish sentiment, China polyester chain painted a rosy picture.

3. Improvement in PX supply and demand fundamentals

In terms of supply and demand, Dushan Energy started its new PTA line on Oct 19, with operating rate at 50%, and planned to lift the operating rate to 100% in Nov, but China’s PX inventory continued increasing, as Dongying Weilian started its new 1 million mt/yr PX plant in Sep and Sinopec Hainan Refining’s 1 million mt/yr PX plant resumed production in late Sep. However, the startup of new PTA plant relieved the shortage of storage tank space for PX, and with more fresh PTA plants to come on stream, demand for PX is expected to pick up.

Looking forward, can we expected continuous widening in PX-naphtha spread?
In the short term, Zhongjin Petrochemical’s 1.6 million mt/yr PX plant is slated to shut in end-Nov for 2-month maintenance. Fuhaichuang also has maintenance plan in Dec. As for PTA, there would be less plant maintenance than in previous months. Sinopec Yangtze plans to shut its 350kt/yr PTA plant in end-Oct for maintenance. OPSC could shut its 750kt/yr PTA plant in Nov, and Yisheng Hainan could shut its 2 million mt/yr plant in Dec for maintenance. In addition, Fuhaichuang and Sichuan Nengtou also have maintenance plans. Without any unscheduled PTA plant shutdowns, PX inventory could decrease in Dec.

In medium term, new PTA capacity expansion could get delayed to the first quarter of 2020. However, as there will be Spring Festival holiday in China when demand is expected to weaken and PTA is under strains of high inventory, PTA-PX spread may narrow further.

In a conclusion, PX-naphtha spread recovers lately thanks to the improvements in fundamentals. In the medium term, further recovery could be short-lived, as PTA margins could get squeezed with more new plant coming on stream, and PX supply could increase after the widening of PX-naphtha spread.
[RISK DISCLAIMER] All opinions, news, analysis, prices or other information contained on this report is provided by analyst of Zhejiang Huarui Information Consulting Co., Ltd (CCFGroup) as general market commentary and does not constitute investment advice. CCFGroup will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
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