Introduction: In the first half of 2026, the domestic phthalic anhydride (PA) market experienced a pattern of first surging and then declining. Geopolitical conflicts in the Middle East became the primary driving factor for this round of the PA market. Following the blockade of the strait, international crude oil prices surged. Driven by cost-side factors, the domestic PA market saw a rapid price increase. However, after two consecutive months of gains amid a tightening supply atmosphere, a negative demand feedback emerged on the consumption side as high prices could not be effectively passed down the chain. The main factor influencing PA market fluctuations shifted from cost-side to consumption-side dynamics, leading to two consecutive months of price declines.
I. PA Spot Prices and Price Spread Trend between Ortho-xylene-based and Naphthalene-based PA Sources
In January-February, PA market prices showed a trend of first rising and then falling. During this period, cost-side factors were the main driver of market increases. However, impacted by the Chinese New Year holiday, demand weakened. Under the negative demand feedback, domestic PA market prices initially surged and then declined. Entering March-April, Middle East geopolitical conflicts and the blockade of the strait led to a sharp rise in international crude oil prices, which in turn drove a significant increase in chemical commodity futures prices. Coupled with maintenance shutdowns in the upstream ortho-xylene (OX) industry, the tightness of raw material supply intensified. Driven by cost-side pressures, domestic PA market prices experienced a rapid short-term surge. In May-June, the main factor influencing the market reverted back to demand-side dominance. As downstream producers generally reduced output due to compressed profit margins, negative demand feedback gradually impacted the market. Moreover, under the expectation of US-Iran peace talks and the reopening of the strait, international crude oil prices plummeted, dragging down commodity futures markets. Consequently, domestic PA market prices came under downward pressure.
Affected by the Middle East geopolitical conflicts, the blockade of the strait interrupted crude oil supply. The upstream ortho-xylene industry entered maintenance season prematurely, widening the supply gap for OX. This forced downstream ortho-xylene-based PA (OX-PA) producers to cut output, keeping OX and OX-PA prices high. Meanwhile, naphthalene-based PA (N-PA) producers, using industrial naphthalene as feedstock, saw a significant increase in profit margins during this phase, primarily focusing on locking in profits. Consequently, the price spread between OX-PA and N-PA sources widened substantially, reaching as high as 1500 RMB/tonne. Under this huge price differential, some downstream consumers who originally used OX-PA switched to N-PA, exacerbating the tight supply situation for N-PA.
II. Changes in PA Supply Volume in the First Half of the Year
In the first half of 2026, domestic PA production amounted to 1.09 million tonnes, a year-on-year decrease of 4%. Among this, OX-PA production was 510,000 tonnes, down 15% year-on-year, while N-PA production was 580,000 tonnes, up 7.4% year-on-year. In the first quarter, domestic PA production showed an increasing trend. In January-February, the industry operated at a relatively low capacity utilization rate due to the Chinese New Year holiday and maintenance shutdowns of some units. In March, production recovered as some units restarted, leading to an increase in the industry's operating rate. However, in the second quarter, due to insufficient supply of the raw material ortho-xylene, the OX-PA industry was forced to reduce output, with its capacity utilization rate showing a continuous downward trend. In contrast, the N-PA industry, benefiting from high profit margins, maintained a high willingness to operate, and its capacity utilization rate increased significantly.
III. Changes in PA Consumption Volume in the First Half of the Year
Overall, downstream profit margins were strong in the first half of the year before weakening later. Looking at the profit distribution along the PA industry chain, profits were concentrated in the upstream raw material ortho-xylene segment. Profit margins for the OX industry showed a sustained and significant growth trend, reaching over 1500 RMB/tonne in May-June. In contrast, the OX-PA industry remained in a loss-making state. The N-PA industry, benefiting from high oil prices, saw a substantial increase in profit margins starting from March, peaking in April-May at over 1200 RMB/tonne. However, since June, following the end of the geopolitical conflict and the reopening of the strait, international crude oil prices fell, causing the profit margins of the N-PA industry to begin declining and normalizing. The profit margins of the main downstream product, DOP (dioctyl phthalate), experienced a rise followed by a fall. Initially, benefiting from low-cost feedstock purchased before the conflict erupted, DOP industry profits continued to climb. However, starting from May-June, DOP producers were forced to accept high-priced raw materials while facing pressure from negative demand feedback. As a result, industry profits declined continuously, and by June, the DOP industry fell into a loss-making state.
As of the end of June, the capacity utilization rates of all downstream product sectors were lower than pre-conflict levels, with a particularly notable decline in the capacity utilization rate of the main downstream plasticizer industry.
IV. PA Supply-Demand Balance & Price Forecast for the Second Half of the Year
Based on supply-demand data, with the decline in crude oil prices and the resumption of passage through the strait, July is likely to be the only month in the second half of the year where the PA supply-demand balance shows a deficit. From August to December, previously idled PA units are expected to restart, leading to an abundance in supply. As the supply-demand balance turns positive, this will exert downward pressure on prices. PA is expected to exit the high-price environment caused by the supply shortage in the first half of the year. OX-PA prices are forecast to fall back to around 7000-7500 RMB/tonne, while N-PA prices are expected to decline to around 6500-6800 RMB/tonne.
In terms of inventory, due to the continued tight supply of the raw material ortho-xylene in July-August, the capacity utilization rate of the domestic OX-PA industry will remain at a low level. It is expected that the domestic OX-PA industry will be in a continuous destocking state in July, with inventory levels potentially dropping to historical lows by the end of July. Meanwhile, as N-PA replaces some of the demand for OX-PA, the supply of N-PA is expected to remain relatively tight, providing some support against the market downturn. Against the backdrop of a declining market, the downstream sector will also be in a passive destocking mode, keeping PA inventories at the downstream level relatively low. Therefore, within the medium-to-long-term downward trend, there will still be opportunities for short-term rebounds in the PA market during July-August. Attention in July should be focused on the PA market's trading volume at relatively low price levels and export transaction volumes following a sharp drop in the price of the raw material ortho-xylene.
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