Asia’s Benzene Outlook Clouded by Volatility, Weak Demand Recovery

Asia’s benzene market has entered May caught between limited spot supply and deteriorating downstream demand, leaving buyers and sellers sharply divided over price direction as volatility in crude oil and naphtha markets continues to ripple through the petrochemical chain, according to industry sources.

The prolonged Middle East conflict and the two-month closure of the Strait of Hormuz have disrupted naphtha flows into Asia, forcing regional crackers to reduce operating rates and triggering multiple force majeure declarations across the petrochemical sector. While the resulting supply tightness supported benzene prices through March and April, weakening derivative margins, slowing Chinese import demand and a recently closed arbitrage window to the U.S. have increasingly clouded the near-term outlook.

Spot benzene prices in Asia reflected the supply disruption. The benchmark midpoint of the OPIS benzene assessment averaged $1,047 per metric ton FOB Korea in March before climbing another 8.7% month on month to average $1,139/mt FOB Korea in April, according to OPIS data.

At the same time, naphtha costs also surged as buyers scrambled to rebuild inventories amid fears of prolonged feedstock shortages. The midpoint of the OPIS CFR Japan naphtha assessment averaged $995/mt in March and rose a further 3.5% to $1,030/mt in April. Naphtha values averaged $608/mt CFR Japan in February before the Iran war.

“High energy prices remain a bullish factor for benzene,” said Brian Lee, executive director at Chemical Market Analytics by OPIS. “But at the same time, margins for most benzene derivatives have turned negative, which is limiting downstream demand growth.”

The sharp escalation in feedstock costs severely compressed benzene production economics across Asia. Starting from March 19, the benzene-to-naphtha spread fell into negative territory and remained there until early April as naphtha prices outpaced gains in benzene.

The monthly average benzene-to-naphtha spread shrank from around $160/mt in February to $53/mt in March before recovering to $109/mt in April. Even after the rebound, margins remained below the estimated breakeven threshold of around $150-$200/mt required by many regional producers.

Asian crackers responded by cutting operating rates to conserve feedstock and reduce losses. Several regional producers in Northeast and Southeast Asia reduced cracker utilization rates throughout April as limited naphtha availability continued to constrain operations.

The tighter production environment sharply curtailed regional benzene availability.

Exports from South Korea, Asia’s largest benzene exporter, fell nearly 47% month on month in April to 139,147 mt from 263,658 mt in March, according to Korea International Trade Association data. Chinese imports mirrored the slowdown, plunging 57% over the same period to 112,607 mt from 260,858 mt.

Market participants said the steep decline in Chinese imports reflected both reduced spot availability in the regional market and weaker buying appetite from downstream consumers.

“China import demand has slowed considerably,” Lee said. “Derivative producers are facing squeezed margins and many buyers completed replenishment earlier during the supply panic.”

Demand from China, Asia’s largest benzene importer, weakened further entering May as downstream derivative plants either shut or reduced operating rates during the week-long Labor Day holiday period.

Several downstream sectors, including styrene monomer, phenol, cyclohexane and caprolactam, faced increasing pressure from rising feedstock costs and sluggish finished-goods demand. Market participants said many derivative producers struggled to fully pass on higher benzene costs to end-users amid deteriorating macroeconomic conditions.

Asian economies have faced mounting inflationary pressure following the spike in crude oil and energy costs caused by the Middle East conflict. Higher transportation and utility costs, combined with slowing manufacturing activity, have weighed on broader petrochemical demand across the region.

As a result, many Chinese buyers shifted into a cautious, bargain-hunting mode despite tightening regional supply.

Commercial benzene inventories held in shore tanks along East China have declined for eight consecutive weeks, but stockpiles remained above 230,000 mt, levels that several traders still considered relatively elevated.

“Even though inventories are falling, they are not critically low,” said a China-based trader. “Buyers are not in a rush because downstream demand has remained fairly stable and everyone is waiting to see where energy markets move next.”

Further pressure may emerge from growing domestic Chinese supply following Washington’s sanctions on Hengli Petrochemical. These affect Hengli’s integrated complex in Dalian, Liaoning province, which includes 1.42 million mt/year of benzene production capacity, 720,000 mt/year of styrene monomer and 420,000 mt/year of phenol capacity.

Although most of the company’s benzene production is utilized in its own downstream production, market participants said restrictions on exports from the company could redirect more material into the domestic Chinese market, potentially increasing spot availability for some benzene derivatives, especially SM.

“Hengli’s inability to export has weighed on local China sentiment because those barrels may remain trapped domestically,” said another China-based trader. “That is one reason buyers are becoming more cautious.”

The prospect of additional weakness in the downstream sectors has already pressured sentiment in China’s spot market. The midpoint of the OPIS domestic China benzene assessment fell 6.4% from 8,845 yuan/mt ex-tank — equivalent to $1,129 CFR China on an import parity basis — on April 30, before the Labor Day holiday, to 8,280 yuan/mt ex-tank by May 8, according to OPIS data. Market participants said the decline reflected cautious downstream buying interest following the holiday period.

Looking ahead, the supply outlook outside China may gradually improve from May onward.

South Korean crackers are expected to raise operating rates by around 5%-10% following government intervention aimed at stabilizing domestic petrochemical supply chains. “Although it is a small increase, Korean crackers increasing operating rates is becoming a bearish factor for benzene,” Lee said.

South Korea recently launched a KRW674.4 billion ($459 million) support package to secure alternative naphtha supplies and stabilize petrochemical production following disruptions linked to the Strait of Hormuz closure.

Under the initiative, the government will subsidize 50% of the difference between pre-war naphtha prices and actual import costs for cargoes contracted through June. Authorities are also working to establish alternative shipping routes that bypass the Strait of Hormuz while accelerating emergency imports of feedstocks.

According to government estimates, South Korea has secured approximately 2.1 million mt of naphtha inventories, equivalent to roughly one month of domestic demand.

The government has also directed domestic petrochemical producers to prioritize feedstock supply for healthcare products and essential consumer goods in an effort to mitigate the broader economic impact of the energy crisis.

The expected rise in Korean operating rates comes as arbitrage opportunities to the U.S. market have weakened significantly.

Earlier in April, soaring U.S. benzene prices opened an unusually attractive arbitrage window for Asian exporters. The spread between U.S. and South Korean benzene prices widened beyond $200/mt on April 1, with the weekly average spread increasing from $205/mt to $271/mt by the end of April.

The widening spread has encouraged several export cargoes from Asia despite elevated freight rates and additional tariff costs.

In April, a total of 18,000 mt of benzene was loaded from South Korea to the U.S., while another 20,000 mt-25,000 mt cargo was heard scheduled for loading in May. Freight costs for the route were heard in the high $80s/mt to low $90s/mt range.

Even with the tariff on South Korean-origin benzene imports into the U.S., traders previously said the arbitrage remained workable due to the sharp premium in the US market. However, the price spread between the two regions narrowed in the week ended April 24 and largely closed as downstream US demand softened and benzene prices retreated.

“There were some volumes planned for late April and May, but demand in the U.S. weakened and the arbitrage closed,” Lee said. “I heard one April parcel was cancelled and only the May cargo remains.”

The closure of the U.S. arbitrage window removed an important outlet for Asian surplus material at a time when Chinese import demand has been slowing. On the other hand, U.S. benzene prices started spiking at the end of April, leading to expectations that the arbitrage could reopen.

As such, sellers are reluctant to aggressively lower offers given the potential U.S. arbitrage, ongoing uncertainties surrounding Middle East supply flows and regional operating rates.

Energy markets have remained highly volatile in recent weeks as crude oil and naphtha prices swung sharply on alternating headlines surrounding ceasefire negotiations and the potential reopening of the Strait of Hormuz.

While some market participants expect feedstock supply conditions to gradually normalize if peace negotiations progress, others warned that logistical disruptions and insurance risks could continue limiting vessel movements even if the waterway formally reopens.

“People are still uncertain whether normal trade flows can resume immediately,” said a Singapore-based trader. “Even if the conflict de-escalates, shipowners and insurers may remain cautious for some time.”

The combination of recovering regional production, slowing downstream consumption and persistent geopolitical uncertainty has left the benzene market without a clear direction entering the second quarter.

Supply remains constrained relative to historical norms, but demand fundamentals have weakened considerably as derivative margins erode and buyers delay purchases amid heightened uncertainty.

With Chinese and U.S. demand softening while operating rates in Asia gradually recover, market participants said benzene prices could remain highly reactive to developments in crude oil, naphtha availability and geopolitical headlines in the weeks ahead.

“The market is struggling to find balance,” added the Singapore-based trader. “Supply is still tight, but demand is no longer strong enough to support another major rally unless energy prices spike again.”

—Reporting by Hazel Kumari, hkumari@opisnet.com; Editing by Mei-Hwen Wong, mwong@opisnet.com