$5/gal benzene: Here to stay, or recurring but shortlived fad?

If you sell, buy or trade benzene or any of its derivatives, you have heard this assertion before:

Five-dollar-a-gallon benzene is a reality. It’s here to stay.

It’s not a new one. In fact, you probably first heard in early- to mid-2012, or earlier if you are really plugged in, as they say. Benzene prices went on to breach the $5/gallon ($1,495/mt) three times later that year.

I once heard one forecaster tell an audience that $5/gallon would be the norm in 2013. I believed him (sort of).

Yes, the styrenics chain guys in the room gasped a bit, and I’m pretty sure the other downstream guys (cumene, phenol, cyclohexane and others) would have had similar reactions.

If you are unfamiliar with benzene, don’t feel bad. Just know that it is a key building block in the petchems world, that it has applications in everything from food packaging to insulation, certain nylons, adhesives and toys, and that as a market in the US it keeps my colleague John Calton, our go-to guy for aromatics coverage, rather busy year-round with its roller coaster-like behavior.

Well, the prediction proved wrong as far as the timing, as spot benzene assessments for 2013 averaged just under 441 cents/gallon, actually lower than 2012, per Platts data. (Sidenote: For some reason – legacy, maybe? – the market still talks aromatics prices in cents/gal. Don’t worry – I don’t get it, either.)

But recent behavior in the benzene market has left the door open for redemption for that prediction, meaning it could happen sooner rather than later.

Let’s go back for a second to last November 5, when spot benzene was trading at 399 cents/gal. Now fast-forward to January 15, when benzene hit a record-high 553 cents/gal.

Let’s do the same but with contract prices. November at 410 cents/gal; January at 484 cents/gal. February? Try 509 cents/gal.

Having trouble relating? Imagine you run a business and see the cost of a key raw material soar nearly 25% (contract) or 40% (spot) in just over two months’ time. How do you deal with this?

It’s no surprise, then, that styrene, which is downstream from benzene and ethylbenzene, hit a five-year high for an assessment at 80 cents/lb ($1,764/mt) FOB US Gulf Coast in mid-January.

Meanwhile for polystyrene, one of the thermoplastic resins downstream from styrene, US domestic contract prices for January were assessed at record-high levels of $1.20-$1.22/lb ($2,645-$2,689/mt) delivered-railcar basis for general purpose and $1.30-$1.32/lb for high-impact polystyrene, per Platts data.

That amounts to a whopping 10-cent/lb ($220/mt) hike since November, with producers seeking another 5 cents/lb for February.

Sometimes it’s not as easy as just passing the increase along. The more downstream you go, the more resistance you get.

So back to the question: Will $5/gal be the new normal for benzene?

The fact that the US is massively short benzene seems to support those who say yes. In essence, supply-wise the market seems to be at the mercy of Asia, and South Korea in particular.

According to a recent study by IHS, global benzene demand grew by 2.8% in 2013 (1.12 times world GDP) to just under 44 million metric tons, boosted by thirsty markets in Asia. By 2018, global benzene demand could reach 50 million mt, the study adds.

What does this mean for the US and North American benzene markets in general? Well, for one, that competition for product will be stiffer than ever. Yes, Asia and the Middle East have added capacity, but so long as demand keeps growing, availability could remain limited.

A key factor ailing US benzene buyers is that an already short market has seen production from the steam cracker side of the equation diminished in recent years, as operators of these olefins units lean more heavily toward lighter feedstocks such as ethane, which yields less benzene.

(For being a key building block in the petrochemical landscape, benzene gets little respect, being relegated to “byproduct” status at the refinery and cracker levels.)

Anyway, while anywhere from five to seven crackers–or more, if you believe every press release out there–could be built over the next five years in the US on the back of the shale gas bonanza, these will do little to significantly boost production from the olefins side, as most of those crackers, if not all, will rely on ethane as feedstock.

Any help from Latin America will be limited at best. Brazil exports significant volumes of benzene to the US Gulf Coast. But don’t expect a significant boost in production anytime soon, with many refining and petrochemical projects either delayed or stalled in Brazil and other countries.

But the other side of the coin tells us this: markets can be pretty good at regulating themselves.

If benzene prices climb too high for too long, demand might fall as producers of derivatives find the cost prohibitive or encounter demand destruction.

It’s no surprise, then, to hear of styrene producers choosing to sell their benzene back into the market instead of consuming it, viewing that as a “sensible” approach to the situation (with sensible meaning profitable).

Polystyrene market participants in the US have been warning for a while of demand destruction and product substitution, as the stronger benzene prices puts them at a pronounced disadvantage.

Consider the recent increases in contract prices through January and compare them to those by competing polymers such as polyethylene (no change since September) and even polypropylene (an 8-cent [$176/mt] net gain since October), and polystyrene is in a bad spot, to put it mildly. Not everyone may be able to substitute, but those who can will at least look into it, if they haven’t already.

Lastly on the whole supply-and-demand dynamics is the issue of imports. Record-high prices in the region turned lots of heads globally, and, to hear some sources tell it, now the US could see an armada of benzene-loaded ships arriving in Houston in the coming weeks.

Perhaps not coincidentally, benzene prices in the region have cooled in recent days, losing 59 cents/gal or 11% since setting a record high in mid January, including 16 cents since January 31.

And just like that, spot benzene has fallen below the $5/gal mark for the first time since January 9.

Suddenly, short-covering is so last month. And so is $5/gal benzene, apparently.

Platts