China Slows New Toluene Plant Expansions Amid War, Poor Margins

China has scaled back its aggressive expansion of new toluene capacity as the compounding effects of the ongoing Middle East conflict and depressed downstream derivative margins continue to weigh on the domestic petrochemical sector.

The country is expected to see a total of 381,000 metric tons per annum of new toluene capacity come onstream in 2026. These include BASF (Guangdong)’s 70,000 mt/year plant in Huizhou, Guangdong; Gansu Shoutu New Energy Development Co.’s coal-based 11,000 mt/year plant in Zhangye, Gansu; Sinopec Guangzhou Co.’s 150,000 mt/year plant in Guangzhou, Guangdong; and Sinopec Hunan Petrochemical Co.’s 150,000 mt/year plant in Yueyang, Hunan; data from Chemical Market Analytics by OPIS shows.

This is a far cry from the 906,000 mt of new capacities that had been projected by CMA and industry sources to come onstream this year, meaning that 525,000 mt of these new projects are expected to be delayed to 2027 or 2028, sources said. These include Sinopec Jiujiang’s 320,000 mt/year toluene plant in Jiujiang, Jiangxi; Huajin Aramco Petrochemical Co’s 100,000 mt/year plant in Panjin, Liaoning; and SABIC Fujian Petrochemical Co’s 105,000 mt/year plant in Zhangzhou, Fujian.

Rising energy prices driven by the U.S.-Iran war have triggered a global oil crisis, largely due to supply shortages from the closure of the Strait of Hormuz. According to Intercontinental Exchange data, Brent crude oil futures spiked 43.5% month on month to average $99.59/bbl in March, climbing to $102.46/bbl in April, and peaking at $103.49/bbl in May before cooling to $83.93/bbl in June.

The surge in crude oil prices and tightening global supply prompted all 32 member states of the International Energy Agency to release 400 million barrels from emergency reserves in March. Aimed at stabilizing market supply caused by the Middle East conflict, the joint action did not have a fixed timeline for releasing the stocks into the market.

Although China is not part of the IEA, the country drew on its crude oil reserves and implemented fuel export bans, including restrictions on diesel, gasoline and jet fuel, to prioritize and optimize production of refined products for domestic industries.

Drawing on vast domestic crude reserves provided Chinese refiners with sufficient feedstock to produce naphtha locally, insulating them from global price spikes in the import market. Furthermore, extensive feedstock diversification—via the coal-to-chemicals route and increased utilization of propane and ethane—have helped shield China from broader market supply shortages.

However, the Middle East conflict has severely restricted naphtha supply, driving Asian spot prices upward. Because naphtha—the primary feedstock for aromatics—outpaced finished chemical prices, downstream margins collapsed, making high plant operating rates unprofitable for Chinese producers.

This prompted majority of Chinese aromatics plants — including toluene producers — to take their plants offline for maintenance in the second and third quarters. More than 36 Chinese toluene plants were offline during these quarters for maintenance, taking 1.116 million mt of toluene capacity off stream in Q2 and 988,000 mt of toluene capacity away from the market in Q3, CMA data shows.

The domestic Chinese benzene-toluene price spread—the key metric for determining the profitability of converting toluene to benzene—averaged 836.62 yuan ($124.08)/mt over the first seven months of the year, according to OPIS data. Although this surpassed the FOB Korea spread of $39.73/mt, the spread marginally breached the $120/mt breakeven threshold, offering producers little incentive to pursue toluene plant expansions.

While the benzene-toluene spread appears healthy, actual returns for running toluene disproportionation or TDP units—which process toluene into benzene and isomer-grade mixed xylenes—tell a different story. According to OPIS data for the first seven months of the year, TDP margins averaged just 417.01 yuan ($61.85)/mt. Operating far below the typical $100/mt breakeven threshold, these weak economics are a main contributor to the halt in new Chinese toluene expansions in 2026.

In addition, China’s toluene supply remains in excess. China produces significantly more toluene than its domestic market can absorb, forcing reliance on exports to balance supply and demand—a dynamic that further disincentivizes new capacity startups. According to CMA data, in 2026, the country is expected to produce a total of 14.742 million mt of toluene while domestic demand from its downstream industries is expected to utilize about 13.345 million mt of toluene, leaving a surplus of 1.397 million mt which needs to be exported.

While Asian producers have struggled with feedstock volatility, run cuts and force majeure declarations during the Middle East conflict, China has leveraged its excess capacity to capture vast export opportunities. In the first six months of this year, it exported a total of 821,246 mt of toluene, a year-on-year increase of 123.4% with exports reaching a record high of 228,725 mt in June, customs data shows.

However, with geopolitical uncertainties and economic headwinds triggered by Middle East tensions, coupled with compressed petrochemical margins, industry sources are of the opinion that Chinese producers are not only likely to halt their new toluene plant expansion plans in 2026, new plant startups could also be delayed to 2027 and beyond.

—Reporting by Serena Seng, sseng@opisnet.com; Editing by Mei-Hwen Wong, mwong@opisnet.com