Introduction: The expectation of a tight-to-loose supply scenario for benzene in the first half of 2026 was shattered by the blockade of the Hormuz Strait at the end of February, pushing domestic capacity utilization and import volumes to new lows. After two consecutive months of price increases driven by a tightening supply atmosphere, the consumption side experienced widespread production cuts due to the difficulty of passing on high prices downstream. The primary factor influencing benzene market volatility shifted from supply to consumption, leading to two consecutive months of price declines.
I. Benzene Spot Prices and Spot-Futures Spread Trends
In January-February, benzene prices rose due to high downstream operating rates at the beginning of the year and concentrated procurement demand around the holidays. At the end of February, fears of supply disruption triggered by the Strait incident sparked a short-term, sentiment-driven rapid price surge. As market participants moved past the initial emotional volatility and began trading the impact of future supply changes on prices, significant divergence emerged between the price trends in East China and Shandong markets due to different supply environments. From March to April, the short-term arbitrage window between Shandong and East China occasionally opened amid broad price fluctuations, leading to active southbound benzene arbitrage trading. From May to June, widespread downstream production cuts occurred due to compressed profit margins. Downstream consumption became the primary price driver, and regional arbitrage spreads narrowed.
As Shandong spot prices were significantly lower than futures prices, it became more economical to convert local benzene spot goods into warrants. On April 27, 67.1% of benzene warrants were located in Shandong delivery warehouses. This figure increased by 42.7 percentage points compared to March 26. The widening spread between East China and Shandong, along with Shandong's warrant share shifting from marginal to dominant, collectively indicated that regional supply in Shandong was more ample than in East China during that period. By May 26, this figure had dropped to 53.1%. On June 26, Shandong's warrant share fell to 0%.
II. Changes in Benzene Supply in the First Half of the Year
In January-February, benzene production followed the plan, with capacity utilization slightly lower year-on-year but output exceeding the same period in 2025. Starting in March, concerns about feedstock shortages due to potential reductions in Middle Eastern crude oil supply led benzene producers to implement defensive production cuts. These cuts were concentrated among coastal refineries and petrochemical plants using Middle Eastern crude. Besides defensive cuts, some companies advanced maintenance schedules originally planned for the second half of the year to the first half, further exacerbating the production decline. Weekly output from companies in Jiangsu, Zhejiang, Shanghai, Anhui, and Jiangxi decreased by 49,000 tons/week, a decline of 31%. In Shandong, due to different feedstock sources and the commissioning of new toluene-to-benzene plants, the weekly output drop was only 16,000 tons/week, a decline of 19%.
Driven by rising benzene prices, the profitability of lower-cost hydrobenzene improved. From March to April, the average profit for benzene hydrogenation in Shandong reached 537 RMB/ton, an increase of 408 RMB/ton compared to the January-February average, a surge of 316.3%. Due to improved profitability, the average capacity utilization rate of benzene hydrogenation units from March to April reached 67%, up 9 percentage points from January-February and 6 percentage points from the same period in 2025. Consequently, weekly hydrobenzene output increased by 12,200 tons/week, a sequential increase of 15.9%. From May to June, hydrobenzene profits declined with falling benzene prices, leading to a rapid drop in operating rates. As hydrobenzene production is mainly concentrated in Shandong and areas north of Shandong, the increase in hydrobenzene output primarily supplemented benzene supply in Shandong.
Due to high domestic inventory in Q4 2025, the enthusiasm for benzene imports in Q1 2026 declined, with import volumes falling 14%-20% year-on-year. After the Strait passage was obstructed, many refineries in Japan, South Korea, and Southeast Asia, which rely more heavily on Middle Eastern crude, declared force majeure or reduced output, leading to a corresponding decline in exportable volumes. These regions account for over 95% of China's benzene import sources. Despite supplementary supply from India, whose export channels to the Middle East and Western Europe were disrupted, China's single-month benzene import volume in May fell by 43%. Total imports in the first half are estimated to be 440,000 tons lower than the same period in 2025, a year-on-year decrease of 16.1%. Nationally, 19% of benzene is imported through the Shandong region, while East China's other regions account for nearly 70% of imports. Therefore, the unplanned decline in imports also had a greater impact on the East China region, excluding Shandong.
Consequently, influenced by factors such as uneven regional production cuts, supplementary hydrobenzene supply concentrated in the north, and import reductions concentrated in the Jiangsu-Zhejiang-Shanghai-Fujian region, the supply reduction in East China was greater than in Shandong during the first half of 2026. Southbound arbitrage trading remained relatively active.
III. Changes in Benzene Consumption in the First Half of the Year
Downstream profitability overall weakened in the first half after an initial strong period. At the beginning of the year, only phenol and adipic acid were loss-making. Affected by the Middle East incident in March, the entire industry chain saw collective price hikes, and all downstream sectors except adipic acid became profitable. During this phase, downstream capacity utilization rates showed an upward trend. In April, hindered by price transmission difficulties, styrene and phenol turned loss-making, causing their capacity utilization to decline. Aniline and caprolactam remained profitable, allowing them to maintain relatively high operating rates. From May to June, as most downstream industries entered a loss-making state, capacity utilization rates declined to varying degrees. Only aniline managed to maintain an operating rate above 80%. The benefits from benzene's own production cuts became apparent, with its profit turning positive in June.
By the end of June, capacity utilization rates for all downstream products were lower than pre-crisis levels, and except for aniline, all were lower than at the beginning of the year.
Due to the overall weakening of industry profits, the weighted average profit of benzene downstream sectors fell for eight consecutive weeks starting from March 19, re-entering negative territory in late April, ending a 20-week period of positive values. The weighted capacity utilization rate in May fell back to the 2025 level of 69%, dropping to 65% in June, a year-on-year decline of 9 percentage points. The weighted downstream profit fell to -515 RMB/ton by the end of June, hitting a new low since January 2025.
Therefore, due to weakening profits, benzene downstream consumption standards were sluggish, with monthly consumption volumes declining continuously from April.
IV. Changes in the Benzene Supply-Demand Balance in the First Half of the Year
In the first half, actual benzene production and imports were lower than expected. Hydrobenzene output was higher than expected due to good profitability, but its relatively small scale could not compensate for the losses from reduced benzene production and imports. Actual benzene supply from April to June was 190,000 to 470,000 tons/month lower than expectations set in February, and this gap widened compared to the 250,000 to 400,000 tons/month predicted in April.
Actual consumption for downstream products also fell short of expectations from both late February and late April due to losses. Actual benzene consumption from April to June was 50,000 to 330,000 tons/month lower than the February expectation, a gap that also widened compared to the 50,000 to 250,000 tons/month predicted in April.
The benzene supply-demand balance experienced inventory draws for four consecutive months in the first half. The actual draw from April to June was 570,000 tons, lower than the April forecast of 880,000 tons. From March to May, the continuous inventory draw provided positive support for prices. However, because the actual supply-demand gap from April to June was smaller than previous forecasts, prices previously traded based on larger de-stocking expectations were considered overvalued. After the actual supply-demand gap narrowed and corrected, forward benzene prices were revised downward. Combined with the expectation of supply returning in the distant months due to the reopening of the Strait, this became the main driver of the price decline.
V. Supply-Demand Gap and Price Forecast for the Second Half of 2026
Based on supply-demand data, with falling crude oil prices and the resumption of Strait passage, July may be the only month in the second half of 2026 where the benzene supply-demand gap is negative. From August to December, previously idled benzene units are expected to resume operations, leading to ample supply. The return of the supply-demand gap to positive territory will put downward pressure on prices. Benzene is expected to move out of the high-price environment caused by the supply shortage in the first half, with prices falling back to around 6,000 RMB/ton.
From an inventory perspective, due to reduced imports, port destocking has accelerated, reaching the 2025 line and the five-year average line in early June. It is expected to reach critically low inventory levels by the end of July. As port storage areas serve as the underlying assets for East China spot and forward trading, low inventories can easily lead to short squeezes and price surges. Therefore, within a medium-to-long-term declining environment, benzene still has opportunities for short-term rebounds in July-August.
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