FocusAsia naphtha inter-month spread to rise on tight supply

23 February 2012 07:51  [Source: ICIS news]

By Quintella Koh

SINGAPORE (ICIS)--Asia’s naphtha inter-month spread between the first half of April and the first half of May is expected to widen in backwardation as demand for prompt shipment cargoes is likely to stay strong amid tight supply, market sources said on Thursday.

Backwardation occurs when the difference between the forward price and the spot price is less than the cost of carriage, thereby eliminating the opportunity for delivery arbitrage.

Under normal circumstances, commodity markets are usually in contango, where the forward price is higher than the spot price to account for the cost of carriage.

The price difference between the first half of April and the first half of May on Thursday was assessed at $19.00-22.00/tonne (€14-17/tonne) Japan quotes CFR (cost & freight), up $9.00-12.00/tonne from Wednesday’s assessment, data from ICIS pricing shows.

The CFR Japan quote for the first half of April was at $1,062-1,064/tonne on 22 February, while the CFR Japan quote for the second half of April was at $1,052-1,054/tonne.

Traders, buyers and brokers said that demand for prompt naphtha cargoes will remain strong as cracker operators in Japan, South Korea and southeast Asia have been ramping up on their production rates.

A lighter turnaround schedule this year is expected to worsen the shortage of spot naphtha supplies, several cracker operators said.

Naphtha-based crackers in South Korea are operating at 100% of capacity, while naphtha-based crackers in Japan are running at 80-85% of capacity, market sources said.

Naphtha-based crackers in southeast Asia are running at 90-95% of capacity.

Meanwhile, European-origin naphtha cargoes, the traditional alternative source of supply to Asian cracker operators, have dwindled from the end of February, as the price difference between the CFR Japan and CIF (cost, freight and insurance) NWE (northwest Europe) quotes have been narrower than spot freight rates.

Several naphtha sale tenders were concluded at extremely high premiums over the last few days, attesting to the demand for prompt month naphtha cargoes, market sources said.

South Korea’s LG Chem on Tuesday purchased by tender two 25,000 tonne open-spec naphtha cargoes at a $23.50-24.00/tonne premium to Japan quotes CFR, traders said.

The cargoes are scheduled to be delivered in the first half of April, according to the traders.

Some South Korean traders said the cargo priced at a $23.50/tonne premium was destined for Yeosu, while the cargo priced at a $24.00/tonne premium was scheduled for delivery to Daesan.

LG Chem last bought a 25,000 tonne open-spec naphtha cargo for delivery to Yeosu in the second half of March at a $19.50-20.00/tonne premium to Japan quotes CFR.

At the end of last week, India’s Mangalore Refinery and Petrochemicals Ltd (MRPL) sold by tender three naphtha cargoes totalling 105,000 tonnes for loading from late March to mid-April, traders said.

Each 35,000-tonne cargo will be loaded from New Mangalore port on 25-27 March, 5-7 April and 14-16 April.

The first cargo was awarded to Unipec at a premium of $45/tonne (€34/tonne) to Middle East quotes FOB (free on board), while the SK Energy won the second and third cargoes at premiums of $40/tonne and $39.50/tonne.

The company also previously sold by tender 35,000 tonnes of naphtha for loading on 26-28 February, at a premium of $32.25/tonne to Middle East quotes FOB.

“The premium paid by LG Chem is the highest since 2010, based on internal data that I have collected,” said a market source.

“We can expect to see more of such premiums concluded in naphtha tender sales given the current regional shortfall,” the source added.

Additional reporting by Peh Soo Hwee

($1 = €0.76)

By: Quintella Koh
+65 6780 4372

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