FocusAsia cracker operators mull rate cuts on high naphtha prices

08 March 2012 04:00  [Source: ICIS news]

By Peh Soo Hwee

SINGAPORE (ICIS)--Asian cracker operators are considering to reduce operating rates in March as their margins have been hammered by the recent hike in feedstock naphtha prices, market sources said on Thursday.

Ethylene margins based on naphtha feed in northeast Asia fell into negative territory during the week ended 2 March, according to ICIS data.

The margins tumbled by $74/tonne (€56/tonne) to their lowest levels since early December at minus $17/tonne, partly because of the surge in naphtha prices and a decline in butadiene prices

Cracker margins in southeast Asia similarly fell by $81/tonne to $26/tonne.

“There is no move to cut rates for now but our margins are getting narrower and narrower,” said a producer in South Korea.

Cracker operators in Asia typically need a spread of at least $250/tonne between naphtha and ethylene prices just to break even.

The CFR (cost & freight) Japan naphtha quote hit a 45-month high on 2 March to be assessed at $1,166.00-1,167.00/tonne, but prices have since pulled back as on news that almost one million tonnes of deep-sea cargoes from the West will reach Asian shores this month.

However, from the cracker operators' perspective, feedstock naphtha prices are still extremely high, as prices in the downstream olefins markets are unable to keep pace with the upward trend of naphtha.

The CFR Japan naphtha quote was assessed at $1,092.50-1,095.50/tonne on 8 March, up $10.50-11.50/tonne from the previous day.

Traders said the spike in raw material costs is more keenly felt in Japan where crackers enjoy less economies of scale because of the size of these facilities and as the plants are also relatively old.

“The dollar per tonne cost is much cheaper in Korea as they have relatively newer and bigger crackers,” said a regional trader in Japan.

The run rates in Japan are the lowest in Asia at around 80-85%, according to ICIS data.

Crackers in South Korea are mainly still running at full steam but China has already moved to trim operating rates.

In southeast Asia, crackers are generally running at 90-95% capacity.

Sinopec said on Tuesday that the operating rate at its naphtha crackers was reduced to 90-95% this month from an average rate of close to 100% in February. Sinopec operates 16 crackers either on its own or through joint ventures.

Cracker margins in Asia had recovered from earlier lows in November 2011 in the first quarter of 2012, lifted partly by hikes in olefins products such as butadiene and propylene.

But the recent decline in these markets because of weak derivative demand has put the heat on producers to review their ethylene plant operating rates, industry sources said.

The earlier spike in olefins prices had taken a toll on demand from downstream sectors ranging from polymers to synthetic rubbers (SR) as the pricing of such products has not kept pace with the jump in feedstock values.

Several downstream SR producers in China, South Korea, Taiwan and southeast Asia have either cut production, or are mulling a reduction in operating rates, or a shutdown of facilities in March and April because of high butadiene feedstock costs.

Market sources said lingering concerns over the Eurozone debt crisis continue to affect demand for petrochemicals, which are used as feedstock to produce finished goods ranging from textiles to cars and toys.

Exports from Asia tend to head to key markets such as Europe and the United States and thus an economic slowdown in these economies hurts manufacturers here.

“Demand is really slow and everyone is in a difficult situation,” said the Japanese trader.

Additional reporting by Quintella Koh

($1 = €0.76)

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

By: Peh Soo Hwee
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