China to cease being net-importer of toluene by 2009: sources

China will cease to be a net importing region of toluene by 2009 as the country achieves self-sufficiency with the startup of new domestic capacities and lackluster downstream demand, market sources said July 14.

Spot trade on the delivered CFR China benchmark has come to a standstill since end-May, Platts data showed.

The last trade concluded on a CFR China basis was on May 22, at $1,180/mt (L/C 90 days), between South Korea's SK Energy and a Shanghai-based trading house Yuan Bang, for delivery in second-half of June 2008.

Since then, there have been no transactions into China, and even in May, the number of CFR China trades were sparse, market participants said.

The period coincided with the startup of several new domestic capacities in the mainland.

The additional toluene capacities from these three units this year totalled 553,700-653,700 mt/year, far outweighing China's total imports of 444,638 mt in 2007, import statistics from Chinese customs showed.

China's yearly toluene imports had been on a steady decline since 2005.

The country's toluene imports fell 22% to 444,638 mt in 2007 from 567,137 mt in 2006, and China's toluene imports in 2006 was 29.6% lower from 2005.

At the beginning of this year, China's toluene imports were estimated to decline by at least another 20% in 2008, but market participants now believe that percentage to be no longer accurate.

"Theoretically, with all the new capacities this year, China is self-sufficient and no longer needs to import toluene. But there still exists many long-term import contracts that must be honored and that has also contributed to the length," a company source from Sinopec Corporation said.

The major producer had announced a reduction in its ex-works toluene prices in East China for August, which was at Yuan 9,300/mt($1,365/mt) - Yuan 100/mt lower from July 2008.

The decrease, in spite of persistently high raw material costs, was attributed to oversupply and lackluster domestic demand from downstream benzene and styrene monomer sectors.

Current inventory levels in East Chinese ports were reported as high as 50,000 mt, while South China levels were at 15,000 mt, despite lack of imports in June and July.

"Inventory levels in Sinopec's tanks are high because downstream demand is poor," said a trader. "Even without imports, stocks are high. China is no longer a net-importing market," said a trader.

Chinese Imports to cancel CFR China term contracts in 2009

With more than sufficient domestic supply to meet local demand, several Chinese trading houses and distributors expect to discontinue their long-term contracts in 2009.

One Chinese trading house and local distributor, China Resource Chemical, was seen offering its term contract cargoes, supplied by South Korean producers, at discounts to the FOB Korea and CFR China benchmarks assessed by Platts.

The company was unable to re-distribute those term cargoes and sell it in the local spot market at a profit or a cost breakeven.

If the current market situation persists till year-end, China Resource Chemical will cancel their term contracts in 2009, a company source said.

It is a loss-making endeavor, local sources said, as domestic prices at Yuan 9,400-9,450/mt ex-tank levels in East China, which equated to $1,140-1,147/mt on an import parity basis, trailed prices on the CFR China benchmark by $50.5-57.5/mt, assessed at $1,197.5/mt on July 11.

And on that day, the CFR-China/FOB-Korea spread was negative by $52.5/mt.

Chinese Imports to cancel CFR China term contracts in 2009

Furthermore, legislation on the import of toluene was not in favour of Chinese traders and distributors.

Unlike other more downstream petrochemicals, toluene end-products are not typically re-exported and hence there are no export rebates on the import of toluene cargoes.

Therefore, Chinese buyers have to fully absorb the 17% value-added tax and import duties.

"The policies in place are unfair for aromatics," said a local distributor.

Created: July 21, 2008

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