UpdateSinopec trims cracker rates on diesel crunch, weak demand

02 November 2011 06:15  [Source: ICIS news]

(adds comments from analyst, with recasts throughout)

By Peh Soo Hwee

SINGAPORE (ICIS)--Chinese state-owned petrochemical major Sinopec has reduced the operating rate at its crackers this month as the company tries to address the tight supply of diesel in the domestic market, a company source said on Wednesday.

Weak market conditions in the derivative polymer markets also prompted the company to cut its ethylene output, the source said.

The operating rate of Sinopec’s crackers was reduced to around 90% in November from an average run rate of 95% in October, said the source without elaborating on details.

The company operates 13 crackers either on its own or through joint ventures.

Sinopec is producing more diesel at the expense of light distillates, such as gasoline and naphtha, to ease the supply shortage in the Chinese market. This meant lesser naphtha output to feed into its crackers for petrochemical production.

A diesel shortage has been spreading across China since mid September, as supply is failing to catch up with increasing demand, industry sources said.

State-owned PetroChina had also said earlier on that it has increased the volume of its diesel production and imports to help out ease the fuel supply situation.

“Chinese refiners have the capability to meet the country’s diesel demand if they run at high rates,” said Victor Shum, managing consultant at Purvin & Gertz in Singapore.

“But when there is a disconnect between international crude oil prices and domestic fuel prices, there may not be sufficient economic incentives for the Chinese refineries to maintain high crude processing rates, which may have led to the current diesel supply tightness.”

Fuel prices in the domestic Chinese market, however, remains largely regulated. Under the existing pricing mechanism, China adjusts its fuel price when the 22-day moving average of international crude prices changes by 4%.

Meanwhile, Sinopec's move to cut its ethylene output this month was largely in line with measures taken by most naphtha cracker operators in Asia, as it has become unsustainable to run the plants at full rates.

Ethylene margins, based on naphtha feed, in northeast Asia fell into negative territory last week - the first time it happened since October 2009 - dragged down partly by declining prices of ethylene and co-products.

Crackers in Japan, Taiwan and parts of southeast Asia are mainly running at reduced rates of 80-90% in October, while there are also talks of impending rate cuts at crackers in South Korea this month. Korean naphtha cracker operators were generally running their ethylene plants at full steam in October.

“(Cracker) economics are still pretty poor,” said a regional olefins trader.

“Downstream products are still weak, and customers are saying their own product prices are still falling,” he added.

Additional reporting by Angie Li and Trisha Huang

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By: Peh Soo Hwee
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