The US polymer shortage is impacting supply in the rest of the world where the US is a major global supplier, but the benzene comments below suggest that this may not be the case where the US is not a major global player. Demand for styrene is high and prices of styrene and polystyrene are higher globally, but this alone is not enough to support benzene in Asia, where there has been a lot of new supply from ethylene units and where there has also been a strong pull on paraxylene to supply new PTA capacity. Reformer-based paraxylene has benzene as a co-product and the PTA expansion in China has been meaningful in the last few months. Separately, the phenol side of benzene demand is not looking as exciting as the polymer markets especially in some of the epoxy resin markets and in particular those facing the aerospace industry. This is a more significant demand impact in the US and Europe, but should also be felt in Asia.
Source: EIA, Bloomberg, C-MACC Analysis, March 2021
With the relative feedstock prices in the US as shown in the chart above, the US ethylene industry is making very little co-product benzene, but although refining rates are low, we expect that reformers on US refineries are running harder than other units, which is why we have not seen the volatility in US benzene that we have seen in propylene – where refinery based production has been subdued for a year now. As refinery rates improve globally, we struggle to see reasons for the benzene market to strengthen – there is simply too much new supply.
Separately, while the first rule in the chemical space is that you take pricing when you can get it, the polyethylene sellers are now looking a little greedy with the April price announcements. Margins are exceptionally high, given the weaker natural gas markets, and as we wrote yesterday, the industry runs the risk of alienating customers but more importantly encouraging those customers to look for alternatives. Some (a few) will find alternatives, and a proportion of that group will stick with the alternatives and possibly not return as polymer prices eventually correct. As a counter-argument, one of the more obvious polymer substitution moves is polypropylene for polyethylene, but as the chart shows below, that arbitrage is gone. However, the reverse arbitrage is open and there may be instances where polypropylene packaging gets replaced with polyethylene or even polystyrene (or PET), depending on the application.