Since the beginning of September, geopolitical tensions in the Middle East have continued to influence crude oil prices and commodity futures markets. The resulting increase in upstream costs provided strong support to the aromatics chain and drove a rapid rise in domestic ortho-xylene (OX) prices.

However, as market expectations shifted toward easing geopolitical tensions and possible peace talks, crude oil and commodity futures prices gradually retreated from their highs. At the same time, several domestic OX production units resumed operations after maintenance, pointing to a gradual recovery in supply.

Against this backdrop, the domestic ortho-xylene market is entering a period in which stronger supply and weakening cost support may place downward pressure on prices, although tight short-term availability could continue to limit the extent of any decline.

Cost-Driven Surge in Ortho-Xylene Prices

Domestic ortho-xylene prices have risen significantly since early September, with the main driving force coming from the upstream cost side.

At the beginning of the month, rising crude oil prices and stronger commodity futures lifted prices across the upstream aromatics chain. As a result, production costs for domestic OX producers increased substantially, providing strong cost support for the market.

In addition to higher upstream costs, relatively tight spot availability and continued price increases from major petrochemical producers further accelerated the upward movement in OX prices. Market participants were initially more willing to accept higher prices as supply remained limited and cost expectations strengthened.

By the middle of September, however, the market environment began to change. Expectations of easing tensions in the Middle East and potential peace talks weakened bullish sentiment in crude oil and commodity futures markets. As upstream prices retreated, the cost-driven support for OX also weakened.

The domestic market subsequently entered a more cautious phase. Buyers became increasingly reluctant to chase high prices, while sellers faced greater pressure to adjust offers. As a result, OX prices pulled back from their previous highs.

Resumption of Operations to Improve Domestic Supply

Supply-side changes are becoming another important factor affecting the OX market.

Since September, several domestic ortho-xylene production units that had previously undergone maintenance have gradually resumed operations. During the month, the Fuhaichuang unit with a capacity of 240,000 tonnes/year restarted, while the Yangzi Petrochemical unit with a capacity of 260,000 tonnes/year resumed operations toward the end of September.

Meanwhile, the restart of the Hongrun Petrochemical unit, with a capacity of 50,000 tonnes/year, and the Hainan Refining & Chemical unit, with a capacity of 200,000 tonnes/year, has been delayed.

Despite these delayed restarts, domestic OX supply has already increased significantly compared with August. With Yangzi Petrochemical returning to operation, the industry's overall capacity utilization rate is expected to rise further in October, potentially reaching around 58%.

The improvement in operating rates should gradually increase market availability and ease the tight supply situation in East China. If more maintenance units return to normal production as expected, the supply side could become increasingly balanced over the medium term.

This would weaken one of the key factors that previously supported higher OX prices.

Profit Margins Decline Across the OX-PA Chain

While OX prices have remained relatively high, profit margins across the supply chain have weakened.

During the period under review, the average weekly composite profit of the ortho-xylene industry stood at approximately RMB 430/tonne, down RMB 130/tonne from the previous period.

Downstream phthalic anhydride (PA) producers also experienced a noticeable decline in profitability. The profit of PA produced through the ortho-xylene route fell by RMB 90/tonne, or 20.36%, to approximately RMB 352/tonne.

Meanwhile, the profitability of PA produced through the naphthalene route declined by RMB 185/tonne, or 68.52%, to only around RMB 85/tonne.

Overall, profitability across the OX-PA industrial chain weakened, although the extent of the decline varied between different sectors.

Upstream OX producers saw their margins narrow, while both OX-route and naphthalene-route PA producers also faced weaker profitability. On the downstream side, the DOP industry moved from profit into losses, while losses in the unsaturated polyester resin (UPR) industry continued to widen.

Recent increases in PA prices have placed additional cost pressure on downstream manufacturers. Although some downstream product prices have recovered, higher raw material costs have prevented profitability from improving uniformly across the entire value chain.

Supply-Demand Balance Expected to Improve

Looking ahead, the domestic OX market is likely to face a gradual change in its supply-demand balance.

On the supply side, the return of maintenance units should continue to increase domestic availability. Although the market may remain relatively tight in the short term, the domestic supply gap is expected to narrow gradually as operating rates recover.

On the demand side, operating rates in the key downstream PA industry are expected to improve, which should support overall OX consumption. A recovery in downstream production could therefore provide some stability to OX demand.

However, the improvement in demand may not be sufficient to completely offset the increase in supply. As more OX capacity returns to operation, the market could gradually shift away from the tight-supply conditions seen earlier in September.

Weakening Cost Support May Limit Further Price Gains

Cost trends will remain another important factor for the OX market.

The recent retreat in crude oil and commodity futures prices has reduced the strength of cost support from the upstream aromatics chain. If crude oil prices continue to weaken, OX producers may face lower feedstock costs, which could further reduce the market's willingness to accept high OX prices.

Nevertheless, the short-term supply shortage provides a degree of support. Even with improving production rates, it may take time for additional supply to fully reach the spot market.

Therefore, the potential downside for OX prices may remain relatively limited in the short term. Market participants are likely to pay close attention to the actual pace of production restarts, downstream PA operating rates, crude oil price movements, and changes in spot market availability.

Market Outlook

Overall, the domestic ortho-xylene market is likely to enter a period of higher supply, weaker cost support, and more cautious demand.

In the short term, tight spot availability and improving downstream consumption could continue to provide some support, preventing prices from falling sharply. However, as more maintenance units resume production and industry capacity utilization increases, the supply-demand balance is expected to gradually improve.

At the same time, weaker crude oil prices could reduce cost-driven support from the upstream aromatics chain. If supply recovery progresses faster than demand growth, OX prices may face increasing downward pressure from their current high levels.

The key factors to watch in the coming weeks include domestic OX operating rates, the actual pace of capacity restarts, downstream PA demand, crude oil prices, and regional spot supply. These factors will determine whether the market stabilizes at a relatively high level or moves into a more pronounced correction.