FocusAsia naphtha to plunge on surplus, crashing product margins

31 October 2011 07:25  [Source: ICIS news]

By Felicia Loo

SINGAPORE (ICIS)--Asia’s naphtha spot prices are likely to fall sharply this week, with crack spreads and inter-month spreads already weakening amid surplus, squeezed margins and falling prices for key petrochemical products, traders said on Monday.

Continued deceleration in China, the world’s second biggest economy, sparked worries over the plastic demand outlook for next year. In response to the bearish situation, some regional producers have begun to rein in operating rates.

“The market is bearish currently. The market will be weak until the end of the year. The economic policy of China, in terms of financing, will be important,” said a trader in northeast Asia.

The open-spec Asian naphtha contract for the first half of December fell by $18.50/tonne (€13.14/tonne) from Friday’s close to $858.00-861.00/tonne CFR (cost and freight) on Monday midday, partly because of weaker global crude futures ahead of the G20 summit later this week, ICIS data showed.

The naphtha crack spread versus December Brent crude futures plunged to $30.38/tonne on 25 October, the weakest since 8 January 2009. The crack spread was assessed at $36.50/tonne on Friday versus $64.28/tonne on 21 October, the data showed.

The spread between the contracts for the first half of December and the first half of January weakened to a contango of $2/tonne on Friday, as compared a backwardation of $2/tonne in the week earlier.

Ethylene margins (naphtha feed) in northeast Asia tumbled by $82/tonne in the week ended 28 October, into negative territory for the first time since October 2009, as ethylene prices weakened by a further $20/tonne and co-product credits fell by 4.8%, according to ICIS.

“It’s a stark reminder of the late 2008 when downstream prices crashed,” said one trader in Singapore.

Ethylene prices in Asia fell to $1,020-1,050/tonne CFR NE Asia in the week ended 28 October, from $1,040-1,070/tonne in the week closing 21 October, ICIS data showed.

Butadiene spot prices in Asia look set to weaken further, possibly falling below $2,000/tonne in November, with pressures mounting for sellers to offload inventory in a bearish market, industry sources said. BD offers were heard last week at $1,900-2,000/tonne CFR NE Asia, with some sellers with stocks in hand quoting around $1,900/tonne CFR NE Asia for November shipments. Spot prices have been plunging in recent weeks, as supply outstrips demand.

“Over the past several months, some crackers could still stick to high operating rates, partly because of healthy rubber prices. But it is getting tougher,” another naphtha trader said.

Amid such a difficult business environment, Japan’s JX Nippon Oil & Energy cut the operating rate at its 460,000 tonne/year naphtha cracker at Kawasaki to 80-85% early this month. The company operated the cracker at around 95% capacity in September.

South Korea’s SK Energy is scheduled to cut the operating rate at its 190,000 tonne/year No 1 naphtha cracker in Ulsan to 70% this month because of poor margins. The cracker operated at 80% capacity last month. SK Energy will continue to run its 690,000 tonne/year No 2 cracker at the same site at full rate.

Poor spot demand continues, with major spot buyer Formosa Petrochemical Corp (FPCC) on the sidelines because of lower operating rates at its three crackers in Mailiao, Taiwan. The absence of FPCC on the spot market compounded the situation, for the company normally purchases at least 300,000 tonnes of spot material each month.

Meanwhile, supply is rising in Asia because Indian refiners are resuming regular naphtha exports after the end of an active refinery turnaround season. The Indian exports are expected to hit 850,000-900,000 tonnes in November, compared with 800,000 tonnes shipped out in October, according to traders. 

Reflecting a bearish market, South Korea’s Honam Petrochemical has bought by tender 25,000 tonnes of naphtha for delivery into Yeosu in the second half of November at a discount of $1.50/tonne to Japan quotes CFR, down from a premium of $1.00-1.50/tonne fetched in the company's previous spot purchase of 50,000 tonnes for the same period of delivery.

Also, Indian refiner Oil and Natural Gas Corporation (ONGC) recently sold by tender 35,000 tonnes of naphtha to Mitsui at a weaker premium for loading from Hazira on 14-15 November. The cargo fetched a premium of $18/tonne to Middle East quotes FOB (free on board), down from a premium of $23/tonne fetched in a previous tender for late October to early November loading.

($1 = €0.71)

For more on naphtha, visit ICIS chemical intelligence

By: Felicia Loo

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