Hamburg (Germany)- The European market has witnessed a continued decline in Toluene prices due to a weakening demand outlook for the commodity. The market value of Toluene is closely tied to the overall demand from downstream and derivative manufacturing units. Recently, Brent crude oil prices, previously supported by OPEC+'s production cuts, fell sharply after the cartel announced a gradual easing of some restrictions. This move sparked concerns among traders about a potential supply increase, leading to a significant drop in crude oil prices. These factors combined to lower Toluene prices in the European market, which settled at USD 1105 per MT, FOB Hamburg, in the last week of May 2024.

A key factor affecting Toluene's price dynamics is the persistent low demand from the coatings, construction, and solvents sectors over the past few weeks. Germany's construction industry is projected to shrink by 4% this year, slightly more than the earlier estimate of 3.5%, according to data from the German Construction Industry Federation. The sector is struggling due to a 12% anticipated drop in residential construction sales and underperformance in public construction projects, further impacting the demand outlook for Toluene.

The European Central Bank is widely expected to cut interest rates in the coming weeks, but uncertainty about subsequent actions is causing anxiety among investors in the Toluene and broader petrochemical markets. This contributes to the overall pessimistic view for construction in the largest economy in Europe, which is dealing with increasing interest rates, elevated inflation, and economic stagnation.

Despite these challenges, there may be conditions for a typical recovery cycle of petrochemicals, inclusive of Toluene, although it will likely take several years to materialize. Rising inflation complicates the prospects for potential policy easing later this year. The only significant euro-zone data point today is German unemployment. Additionally, flooding in central and southern Germany has disrupted global supply chains, with uncertainty over ocean freight and container shortages making it increasingly difficult to ensure vessel availability for Toluene supply.

According to ChemAnalyst, Toluene prices in the European market are expected to decline further amid the slow and steady demand outlook from end-users amidst ample supply. The study from the German Construction Industry Federation underscores that commercial construction is the only segment showing growth, driven by significant orders from local transport authorities. This overall scenario paints a grim picture for the construction sector in Europe's largest economy, which is struggling with rising interest rates, higher inflation, and economic stagnation, consequently impacting Toluene prices in the domestic market in the short term.