Looking at the recent styrene market from the cost side

Since entering December, the kinetic energy of styrene's staged rebound seems to have been exhausted. During this period, the price of the main futures contract EB2005 has fluctuated around 7300 CNY/ton to 7400 CNY/ton. Against the background of the steadily weakening of styrene fundamentals, what is the support price to maintain the current price? After our research and analysis, we believe that the main factor supporting the center of gravity of the current price of styrene is the cost center of styrene.

Directly from the nature of the data, there is a fairly high correlation between price and cost. Using the East China styrene spot benchmark price in recent years, the correlation between East China pure benzene spot price and CFR Northeast Asia ethylene price calculation, we can find that the correlation between styrene and pure benzene price reaches 0.73, and the correlation with ethylene price is up to 0.77. In addition, changes in the cost side will also affect the profit of the industry. Changes in profits affect the start of production in the industry, and then change the supply in the market, and ultimately affect the price of styrene from the level of supply and demand.

After entering December, the price of ethylene in the two major components of the cost side has gradually dropped, while the price of pure benzene has remained high, so it can be inferred that the price of pure benzene determines the cost center, which will affect the recent trend of styrene.

From the perspective of fundamentals, the main factor supporting the current price of pure benzene is tight supply. On the one hand, starting from 2018, the profit of pure benzene production for the whole year has continued to decline, and it has fallen below the breakeven level from the first quarter of 2019, and has maintained losses for up to six months. Affected by long-term losses, the domestic pure benzene operating rate has been declining. On the other hand, the decline in domestic supply alone is not enough to cause such a big change in pure benzene. In fact, other domestic regions and overseas sources cannot timely fill the gap in demand in East China. Subsequent changes in the price of pure benzene.

However, we are not optimistic that the trend of pure benzene can remain strong for a long time. First, driven by the rising prices of pure benzene, several major downstream sources of pure benzene: styrene, caprolactam, phenol, and aniline have all seen a significant contraction in their profit margins. At present, due to the decline in earnings, the start of caprolactam and phenol has both declined. In the future, aniline, which is operating at a high level, is also expected to decline, while caprolactam load is expected to decline further. In addition to downstream restrictions on the current price of pure benzene, the supply side also showed signs of easing during the same period. In the week of December 20, the volume of arrivals in the port has rebounded significantly, and at the same time, the inventory of East China ports has rebounded. In addition, the US-South Korea spread has narrowed to normal levels. It is expected that the pressure on the diversion of goods from the US market will ease, and the arrival in Hong Kong is expected to continue to rise in the later period.

However, the above signals do not represent the imminent collapse of styrene cost end support. Because the current price difference between pure benzene inside and outside the disk still needs to be further repaired, at the same time the domestic equipment maintenance is still large. The recovery speed of the fundamental tightening pattern still largely depends on the development after these two factors.

In summary, it is difficult to continue to increase the cost of styrene in the future. However, if the downward trend is to be achieved, the current fundamentals of the cost side have already shown signs and expectations of the downward trend, but the conditions for making the expected declines are not complete. Therefore, the cost center is expected to be mainly stable within a short period of time, accompanied by a gradual downward decline. If the market outlook for the cost trend becomes clearer and forms a downward synergy with the supply and demand side of styrene itself, it is expected that the price of styrene will fall again.