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China's toluene traders are choosing to accept higher inventory levels and incur tank costs rather than sell into the weak domestic market, industry sources said this week.

 "It's a sticky situation now. The cost of imported toluene is very high. If I sell off volumes domestically, I will not be able to replenish my stock at a reasonable price," a South China-based trader said.

"The digestion of toluene by the downstream market is so bad that the sales and purchase flow is very slow," he added.

 The spread between the import price and domestic price widened in late February, according to Platts data. In January, the CFR China/domestic price spread averaged at $17.09/mt and in February so far, it has averaged at $46.72/mt. During the month, the spread was at its widest on February 16, at $53.81/mt.
 
As South Korea is the largest toluene producer in Asia and China is the biggest buyer, the strength in the FOB South Korea price triggered a run-up in the CFR China price.

The FOB Korea price has risen nearly 10% from $1,110.50/mt on January 3 -- the first trading day of the year -- to $1,221.50/mt on February 27, with prices assessed for a loading laycan over H2 March and H1 April, when the plant turnarounds in South Korea are in full swing.

WEAK CHINA DEMAND, HOLDING BACK OF STOCKS RAISE INVENTORIES

 The persistently weak domestic market and the holding back of stocks have pushed up inventories in China, with the latest level heard at 85,000 mt in East China, up 6.25% from a week earlier. The inventory level in South China was 22,000 mt last Friday, up 10% week on week.

 A trader based in East China has built up an inventory of 8,000 mt on weak downstream demand -- more than twice his usual inventory of 3,000 mt -- on his expectation that crude, and therefore the FOB Korea price, would rise. "It's not because I bought [excess toluene]. Sales was really bad," he said, adding that his tank cost was Yuan 50-60/month ($7.94-9.53/month).

 According to another trader, small outfits typically hold inventories of 1,000-3,000 mt while larger trading houses may hold anything from 3,000-8,000 mt, with 8,000 mt considered as too high.

"More than 8,000 mt is too high for anyone except Sinopec and CNPC," said the source.

The East China trader, who bought CFR China March cargoes at $1,170-1,180/mt, said he was likely to sell on an FOB Korea or CFR China basis rather than in the domestic market in the near future, especially if domestic prices stay weak.

The CFR China marker, for H1 March and H2 March delivery, was assessed at $1,231.50/mt on Monday, up $18/mt from last Friday, while a H1 March delivery cargo was best bid at $1,232/mt, on telegraphic transfer and 90-day credit terms.