By Zhang Shazhi, JLC Chemical

Domestic toluene capacity keeps increasing in recent years on the back of continuous start-ups of petrochemical plants in line with the rapid development of integrated refining and chemical projects. However, the demand from downstream gasoline blending and fine chemical sectors is growing at a slower rate, turning the market into an excess of supply and more severe supply-demand conflict. 

Toluene market features

In 2022, the trading activities and the market prosperity index in China’s toluene market decreased because the logistics and transportation of domestic hazardous chemicals as well as end-user consumption were both hampered by the frequent and highly-contagious COVID-19 variants.However, there were still five new toluene projects reported during the year and the consequently increasing capacities made the supply-demand conflict more intense. Fortunately, a surge in demand in the US opened an arbitrage window between Asia and the US, and hence tightened Asian toluene supply. This laid a good foundation for the export of domestic toluene, so there was a whopping increase of 570.9% in toluene exports year on year, which eased the domestic toluene supply-demand situation. Figure 1 shows the toluene market trend from 2021 to 2022. Seven key influential factors in 2022 were elaborated as below:

Figure 1 China toluene market trend, 2021-2022

First, supported by crude oil prices, the price of related aromatic products has increased, providing some support for the upward trend of the toluene market.

Secondly, the trading activities and the market prosperity index in China’s toluene market decreased during the year because the logistics and transportation of domestic hazardous chemicals as well as end-user consumption were both hampered by the frequent and highly-contagious COVID-19 variants.

Thirdly, with the big price spread between benzene and toluene in the first half of the year, PX products enjoyed big margin room and toluene disproportionation process showed strong economic benefits, so more PX producers chose to outsource toluene, which, in turn, promoted the domestic consumption to increase. The strong demand at home and abroad and the increased crude oil prices pushed up the domestic toluene prices to a nearly 10-year high. 

Fourthly, with the recovery of the US economy and the growth of gasoline consumption, the supply of aromatics products became tighter and tighter, which drove up the prices sharply. At the same time, with the opening of an arbitrage window between Asia and the US, more Asian aromatics products were sold to the US, so the toluene exports from China increased significantly.  

Fifthly, toluene demand at home and abroad decreased from July. The prices of benzene fell, squeezing the PX margin room, so the economic benefits of using toluene disproportionation process were less competitive. Domestic PX producers reduced outsourcing toluene. In addition, gasoline consumption declined after the weather turned cold, weighing down on the domestic toluene prices.

Sixthly, the outsourcing demand for toluene disproportionation process was minimal after the fourth quarter, and the export volume of toluene dropped to a low level of the year. Inventories at ports mounted up, which weighted down on the prices further. However, the oil prices gradually showed signs of bottoming out, and the xylene prices stayed firm, which cushioned the downward room of toluene prices.  

Seventhly, overseas prices continued to fall at the end of the year due to the weakening demand in Asia. This snapped the exporting. At the same time, the domestic supply increased while the demand remained weak, which accelerated the downtrend in China’s toluene prices. 

Toluene supply structure

As shown in Figure 2, China’s toluene capacities were concentrated in the eastern coastal areas and traditional heavy industry areas in 2022, while the capacities in the central and western were limited and scattered. Specifically, the capacities in East China were biggest, accounting for 36%, and the region was also the most active marketplace of toluene; the capacities in North China and Northeast China both ranked second, accounting for 19% respectively; the capacities in South China ranked third, taking up 18%; the capacities in the central and western regions were relatively limited, with the southwest and northwest regions accounting for about 3%, and the central China region ranking last with 2%.

Figure 2 Toluene capacity distribution in China, 2022

In 2022, there were 17 domestic petrochemical plants shut for maintenance, a decrease of 6 compared with 2021. The idled capacity totaled 5.088 million t/a, down by 60 000 t/a compared with 2021 (see Table 1).

There were five new toluene plants reported in 2022, decreasing slightly from 2021. The capacity increment hit 1.97 million t/a, down by 1.53 million t/a compared with 2021. It was mainly for captive use or oil blending, with few for commercial sales (see Table 2)

Import and export

The import volume of toluene during January-December 2022 hit an all-time low, at around 67 700 tons (see Figure 3), a sharp decrease of 67.2% from the previous year.

Figure 3 Toluene import data in 2022

The import volume was relatively big in the first quarter of 2022, at around 45 300 tons, accounting for 59.6% of the whole year. The importing activities were boosted by two reasons. First, domestic supply decreased due to massive shutdowns for maintenance during the quarter. Second, demand from downstream oil blending sector remained robust. However, in the rest three quarters of the year, the import volume fell significantly, largely because downstream demand grew slowly while import prices remained elevated due to tightening supply in other Asian countries. The volume even hit a new low in recent years.

The export volume of toluene fell after a rise during 2022, but the overall growth was significant. To be specific, the volume totaled 648 700 tons, a sharp increase of 552 100 tons or 570.9% compared with last year (see Figure 4).

On one hand, overseas demand strengthened because supply continued to tighten in Asian regions while demand in Southeast Asia and India remained robust. In addition, the flow of goods from Asia to the US due to the opening of an arbitrage window between Asia and the US was another contributor. On the other hand, domestic supply increased sharply as a result of high operating rates of existing plants and start-ups of some new plants, but end-user demand was growing slower than output. This intensified domestic supply-demand conflict and producers were eager to ease the pressure by exporting activities. 

Demand structure and consumption fields

The apparent consumption of toluene in China showed upward momentum from 2018 to 2022. The rise was slow in 2018-2019, but speeded up sharply in 2020-2022 (see Figure 5). Although there were only a few new plants reported from 2020 due to the outbreak of COVID-19 and the moderating domestic economic growth, the overall downstream demand showed small upward trend in line with the acceleration of refining and chemical integration. Especially various needs for gasoline consumption and producers’ needs for captive use and producing other relevant products provided upward space for toluene consumption.

Figure 5 China toluene apparent consumption, 2018-2022

The apparent consumption of toluene was at 16.3 million tons during 2022, up by 9.9% year on year. There were many new plants started up, which contributed to big capacities and hence the overall output during the year. Most producers mainly used toluene for internal oil blending and disproportionation process to continue producing xylene-PX. In the meanwhile, the export volume increased significantly during the year but there was still a large number of products that entered the market, so the apparent consumption decreased from July. 

In 2022, the key downstream market was gasoline blending, accounting for 50% of the total toluene consumption; the second was toluene disproportionation, accounting for 36%; it was followed by TDI and chemical synthesis, accounting for 9%; the last was solvents and others, taking up 5% (see Figure 6). The structure was almost unchanged from 2021 to 2022. Given the promotion of new energy vehicles and the hampered mobility amid COVID-19, the growth of gasoline blending demand slowed down. A sharp reduction in downstream TDI production also weakened demand for toluene. Meanwhile, the demand for solvent coatings decreased. With the start-ups of integrated refining and chemical plants, the demand for downstream oil blending and toluene disproportionation to produce benzene and xylene-PX increased slightly, so the proportion in the downstream consumption structure became increasingly higher.

Figure 6 Proportion of major downstream sectors in 2022

Toluene market outlook 2023-2025

With the development of refining and chemical integration, there will be many new and expansion projects of aromatics in 2023-2025. Although the majority of newly-added capacity will be used for disproportionation to continue producing related aromatics products such as xylene-PX, some products will enter the market, so the supply of toluene will keep increasing. However, the growth of downstream demand will weaken gradually, and the demand side will continue to deviate from the supply side. Therefore, the supply-demand structure will be more severe from 2023 to 2025 (see Figure 7). At the same time, the excessive amount of toluene is expected to flow into the global market continuously by exporting in line with increasing foreign trade negotiation and activities in recent years. Therefore, producers are expected to continue to produce other aromatic products instead of toluene from 2023 to 2025, and exporting activities are expected to increase further. In the context, China will gradually transform from a net importer of toluene to a net exporter.

Figure 7 Forecast of China's toluene market development in 2023-2025