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Asia: China sees toluene, SM, isomer-MX stocks rise on demand, credit woes

https://www.chemnet.com   Mar 09,2011 Platts
The recent fall in demand for styrene monomer, isomer-MX and toluene following a tightening of credit have pushed up inventories in East China to the highest levels in more than six months.

Industry sources said they had expected demand to improve after the Lunar New Year holidays, but this has not happened.

One reason for the weak demand is that downstream plants restarted late after the Lunar New Year break because of shortage of labor, a seasonal problem. China's human resources minister said March 8 that labor shortage was a structural problem that affects labor-intensive manufacturing and service sectors in east coastal areas, Xinhua reported Tuesday.

The government's monetary curbs have also held back demand cutting credit availability. Effective February 24, the government raised the bank reserve ratio by 0.5 percentage point to 19.5%. The move will freeze about Yuan 350 billion ($53 billion) in deposits, based on a deposit balance of about Yuan 71.23 trillion in January, local media reported.

All this has pushed SM stocks to the highest level in 11 months while isomer-MX stocks were at a nine-month high and toluene inventory was this high seven months ago.

HIGH INVENTORY FORCES TRADERS TO EXPORT SM

Asian SM traders were forced to export as tanks brimmed over with 140,000-160,000 mt in stocks in East China this week, market sources said. A year ago, stocks were about 135,000 mt.

A Northeast Asian trader said it is not easy to find buyers in places such as Taiwan and Southeast Asia either. Some traders described it as a "desperate situation."

Arbitrage to Europe could work on paper, sources said, as prices there are almost $120/mt higher than that offered for bonded cargoes in China. March-loading SM was $1,529.50/mt FOB Rotterdam on March 7, while offers for bonded cargoes in East China were around $1,410/mt Tuesday.

Also, a cargo of 7,000-20,000 mt of SM was said to have been shipped to South America in February, according to sources.

"South Korean and Japanese trading companies frequently buy bonded cargoes in China in order to supply to their long-term customers," a Chinese trader said.

Asian SM was assessed at $1,413/mt FOB Korea and $1,409/mt CFR China on Tuesday.

ISOMER-MX STOCKS HIT NINE-MONTH HIGHS

Isomer-MX inventory in East China hit 130,000 mt on February 25, up 68.8% from January 2 when it had seen a low of 77,000 mt.

New capacity in China contributed to the high stocks. In the fourth quarter of 2010, MX production capacity in China increased 1.2 million mt/year. PetroChina Liaoyang Petrochemical Company added 700,000 mt/year of MX capacity following the startup of its 1.4 million mt/year continuous catalytic reformer at the end of 2010. In Qinzhou in the Guangxi Zhuang Autonomous region, China National Petroleum Corporation's aromatics complex started up in September, which added another 500,000 mt/year to its isomer-MX production capacity.

But exports are still to reach high levels due to tax issues. China imposes a 17% value-added tax on isomer-MX imports. Upon re-export, the seller only receive 13% rebate, leaving him with a 4% loss which would have to be absorbed by the exporter.

Demand for imported isomer-MX is low because of high prices. Domestic prices hovering around Yuan 8,050-8,150/mt, or $1,027-$1,040/mt on an import parity basis, much lower than the $1,090.50/mt for FOB Korea cargoes and $1,098.50/mt for CFR Taiwan ones as of Monday.

TOLUENE INVENTORY UP ON WEAK DOWNSTREAM DEMAND

Toluene stocks in East China are the highest level seen in seven months at 150,000 mt on weak downstream demand, sources said. The last time stocks were at these levels was on July 25 last year when they hit 161,000 mt.

This has put the brakes on imports, hurting CFR China prices as it is now unprofitable to ship toluene on an FOB Korea basis to China.

On Tuesday, FOB Korea toluene was assessed $18.50/mt lower from Monday at $1,032/mt, and CFR China letter of credit 90 days was assessed $15/mt higher at $1,041/mt. The spread between FOB Korea and CFR China is now less than the freight cost from South Korea to China, which is about $21/mt, which means those buying on an FOB Korea basis will incur a loss if they ship the cargoes to China.

But, traders said the domestic price of toluene, at Yuan 7,850/mt, is still lower than that of domestic MTBE and so stocks could fall if toluene is used for gasoline blending.

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