FocusAsia faces dearth of deep-sea naphtha as arbitrage window closes

15 January 2010 05:44  [Source: ICIS news]

By Felicia Loo

SINGAPORE (ICIS news)--Asia is likely to face a lower pool of naphtha imports from Europe, as rising freight costs and stronger Western premiums put a lid on fresh bookings of such cross-regional flows of the petrochemical feedstock, traders said on Friday.

The arbitrage window was effectively closed, as the economics of the East-West spread had narrowed to $17-18/tonne (€12-12/tonne) from around $22/tonne, they said.

That would further squeeze naphtha supply in Asia, where robust downstream petrochemicals demand led by China saw naphtha prices spiralling up, traders said.

Benchmark naphtha crack spread closed at $173.60/tonne against Brent crude futures on Thursday, the highest since 22 December, when the crack spread at $176.25/tonne was a 20-month high, based on data from global chemical market intelligence service, ICIS pricing.

“There are no arbitrage fixtures recently,” said one trader, referring to naphtha flows from Europe to Asia.

Some 1.2-1.3m tonnes of naphtha were estimated to land in Asia during January and February, but the volumes for March arrivals were lacking, traders said.

“The arbitrage window is shut. European (naphtha) prices are strong,” a second trader said.

European crackers were using more naphtha as chilly temperatures led to a greater usage of liquefied petroleum gas (LPG), traders said.

Lower-carbon fuel LPG is used widely for heating rooms, water heating, cooking and fuelling vehicles in Europe.

“Europe is also facing tight naphtha supply,” said a trader, adding supplies fell partly due to refinery maintenance works in the West.

Naphtha inventories in the Amsterdam-Rotterdam-Antwerp area fell to 73,000 tonnes in the week ended 14 January from 89,000 tonnes as of 7 January, and current stocks were 32% lower than the 108,000 tonnes logged on 15 January 2009, Reuters news agency reported.

Traders also attributed to costlier bookings of long-ranged vessels as a factor behind the arbitrage window closure.

“Freight costs from the Middle East to Japan have gone up, so owners are trying to push up the shipping rates for Europe-East route,” said a shipping broker who valued the costs for 60,000-70,000 tonnage at $1.8m.

Apart from Europe, refinery maintenance works in the Middle East also hampered Mideast naphtha flows to Asia, where petrochemicals demand remained bullish with most Northeast Asian crackers operating at full tilt to take advantage of the robust margins.

Reflecting healthy demand, Taiwan’s Formosa Petrochemical Corp bought 100,000-120,000 tonnes of open-spec naphtha for second-half February and South Korea’s LG Chem tendered to buy an open-spec cargo for the same period.

Asia’s naphtha inter-month spread between second-half February and first-half March contract held at a firm backwardation of $11/tonne, underscoring the strength of the market that drew support from the bullish downstream petrochemical sector.

For instance, ethylene price offers held firmly at $1,300/tonne CFR NE Asia, ICIS reported.

Although the naphtha market will head into a seasonal demand lull after the Lunar New Year, especially with many ethylene producers embarking on regular maintenance in March, demand for the feedstock will continue to be strong thereafter amid a promising macro-economy, traders said.  

“Economic indicators show that the global economy is recovering and is gaining momentum. This is good for the petrochemicals industry, as there will be more demand for manufactured goods,” said Victor Shum of Purvin & Gertz, in Singapore.

($1 = €0.69)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

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By: Felicia Loo

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