Introduction: The situation between the US and Iran has significantly eased, leading to continued improvements in navigation through the Strait of Hormuz. Oil-producing countries like Iraq plan to accelerate production increases, causing international oil prices to fall this week. Prices in the commodity futures market have also declined, and the cost support from the upstream aromatics chain has collapsed, widening the decline in China's domestic orthoxylene (OX) market.

Cost Support Collapses, Orthoxylene Market Declines

During this period, domestic orthoxylene market prices declined, with the cost factor being the primary driver of the downturn. Affected by the reopening of the Strait of Hormuz, international crude oil prices plummeted, causing the cost support from the upstream aromatics chain to collapse. Additionally, continuous demand pressure from the downstream phthalic anhydride (PA) industry added to the market's downward pressure. However, due to plant maintenance, market supply remained tight, providing some support. As a result, the magnitude of the decline in orthoxylene was more limited compared to other products in the aromatics chain. Meanwhile, the main downstream phthalic anhydride industry continued to suffer losses and faced competition from low-priced naphthalene-based phthalic anhydride feedstock, putting pressure on the downstream ortho-xylene-based phthalic anhydride industry. However, due to concentrated plant maintenance in the orthoxylene industry, the industry's capacity utilization rate remained low, and spot supply was tight, leading to a strong market control situation. Nevertheless, given weak demand, major domestic petrochemical plants adjusted prices downward, driving a moderate decline in orthoxylene market prices.

Concentrated Plant Maintenance, Low Orthoxylene Capacity Utilization

This month, orthoxylene production and capacity utilization declined. Domestic orthoxylene capacity utilization stood at 60%, down 8 percentage points from the previous period and 26 percentage points year-on-year. During the month, three orthoxylene plants were shut down for maintenance (Yangzi Petrochemical, Hainan Refinery & Chemical, and Fuhaichuang), involving a total annual processing capacity of 600,000 tons. The maintenance at Yangzi Petrochemical, Hainan Refinery & Chemical, and Fuhaichuang, along with production cuts at Yulong Petrochemical, were the main factors behind the industry's reduced output. As orthoxylene units enter a concentrated maintenance period, domestic orthoxylene industry capacity utilization is expected to decline further, potentially dropping below 50% in July, reaching a new low in recent years. This will exacerbate the tight supply of orthoxylene feedstock.

Risk Premium Fades, High Industry Profits Face Downward Pressure

During this period, profit trends diverged along the orthoxylene and upstream/downstream value chain. Orthoxylene industry profitability increased, while phthalic anhydride profitability showed divergence. Overall, industry profits tended to concentrate in the midstream segment. Losses in upstream xylene narrowed, orthoxylene profitability grew, losses in downstream ortho-xylene-based phthalic anhydride narrowed, and profitability in the naphthalene-based phthalic anhydride industry declined. Among downstream products, the DOP industry turned from profit to loss, while the DBP industry saw significant profit growth. From the perspective of profit distribution along the value chain, industry profits are concentrated in the upstream orthoxylene segment, while downstream players face significant cost pressure. With the collapse of upstream cost support, orthoxylene industry profits face downward pressure.

Overall, the main contradiction in China's domestic orthoxylene market in July could focus on the collapse of cost support combined with demand-side pressure, putting downward pressure on domestic orthoxylene market prices. It is expected that orthoxylene market prices will decline in the next period. However, the significant reduction in supply due to maintenance is likely to limit the downside space. Weakening cost-side support may exert some pressure on the market. On the supply side, overall operating rates in the orthoxylene industry are expected to decline in the next period, widening the supply gap. Future maintenance plans remain, and forward supply will be tight. On the demand side, the main downstream ortho-xylene-based phthalic anhydride industry is expected to see reduced operating rates due to a shortage of orthoxylene, coupled with expectations of reduced export demand, leading to a decrease in demand.