Benzene Costs Hurt Customers

This past August, the Olympic Games weren't the only venue where records were shattered. Prices in the benzene market have climbed to the highest levels ever seen. And with few prospects for new production to go onstream quickly and high benzene costs failing to scare customers away, market observers see little chance that prices will ease significantly anytime soon.

Contract prices for benzene have increased nearly every month since November 2003, when they were $1.40 per gal, according to petrochemical consultancy Chemical Market Associates Inc. (CMAI). This summer saw the swiftest increase, with prices rising from $2.28 to $2.60 for June contracts, then hitting $3.07 in July and $3.85 in August. September contracts have settled at $3.95 per gal.

The impact of this steep rise is far-reaching. Crompton announced last month that it was reducing capacity for its Flexzone rubber antiozonant, citing, in part, high costs for benzene.

Dow Chemical and BASF recently took the unusual step of tacking a 1/2-cent-per-lb surcharge on the price of methylene diphenyl diisocyanate (MDI) for every 10 cents that benzene climbs over a base benzene price of $1.50 per gal.

Charles Reardon, product market manager for Dow Polyurethanes North America, says the high benzene prices drove Dow to the end of its rope. Every 10-cent-per-gal increase in the cost of benzene drives up the cost of MDI by 1 cent per lb. Reardon says the surcharge is a way to split the increases in benzene costs with its customers.

Robert Snyder, vice president of styrene at Nova Chemicals, says the high benzene costs weigh on profitability, forcing styrene producers to quickly put out price increases. "We have been announcing price increases every month," he says.

The cause of the high benzene prices stems from how the chemical is produced. Benzene is largely made in four processes: at refineries' catalytic reforming units, where the targeted products are octane or benzene, toluene, and xylene mixtures; it is extracted from pyrolysis gasoline coproduced in ethylene crackers; it is a coproduct with xylenes in toluene disproportionation units; and it is made in toluene hydrodealkylation (HDA) plants.

Of all these processes, the only one aimed specifically at benzene production is HDA. Traditionally, HDA units have stabilized benzene prices, according to Simon Palmer, director of aromatics for CMAI. He says short supply and high prices for benzene would entice operators of HDA units to convert toluene to benzene as much as they could. "If the price of benzene became too high, a profit margin would open up to take toluene, put it through those units, and quite quickly--within the period of a quarter--bring the market back to balance," he says.

The past five years, however, saw increased supply coming from new ethylene crackers and aromatics units targeting xylenes, adding too much coproduct benzene to the market. During the same period, benzene demand was low because of the economic slowdown in North America.

Ed Simpson, aromatics business manager for the U.S. at Shell Chemicals, adds that U.S. regulations in the late 1990s limited benzene content in reformulated gasoline to 1%. The benzene volumes went to chemical makers. "All these regulations driving benzene out of gasoline helped industry keep up with demand growth," he says.

HDA units, in this environment of huge excesses of benzene, started to close, Palmer says. For example, he says, Equistar Chemicals idled a 135,000-metric-ton-per-year HDA plant in Chocolate Bayou, Texas, and Valero Energy shuttered two HDA units with a total capacity of 600,000 metric tons per year.

DEMAND, meanwhile, is strong again, but building new HDA units is highly improbable, Palmer says. He explains that there is an incentive to run these units, but fuels remain a greater strategic use for toluene and hydrogen.

Simpson says benzene producers cannot ramp up benzene output significantly because production of it is tied to other products that are driving manufacturing rates. "There is still a 3 to 4% increase in annual benzene demand, and the benzene sourced from reformate and pyrolysis gas from crackers isn't keeping up with it," he says.

Producers believe that the benzene problem is a long-term issue. "It will take time for investments to come onstream," Nova's Snyder says.

Nova is looking to improve the efficiency of its cracker in Sarnia, Ontario, which, Snyder notes, may yield more benzene.

Steve Lewandowski, manager of trading for base chemicals at Atofina Petrochemicals, says the cracker joint venture between BASF and Atofina is considering upgrades to the unit that would increase benzene output. "As a producer, we are always looking--especially when the molecule is valuable--at how you make more," he says.

Relief from higher benzene prices will have to come from easing demand. Substitutes in benzene derivatives can sometimes be made--for instance, the use of polypropylene instead of polystyrene in packaging. But prices for such polymer substitutes are also reaching record highs, giving plastics products makers and end users no reason to make a switch.

Atofina's Lewandowski says the benzene market may only find relief from a slowdown in the economy as a whole, which is completely out of the control of benzene makers. Or derivatives plants will have to become so unattractive to run that they will close.

Obviously, market observers hope that the solution to the problem will not be so drastic.