FocusAsia naphtha to stay soft on supply surplus, poor margins

11 June 2012 06:58  [Source: ICIS news]

By Ong Sheau Ling

Taiwan’s Formosa Petrochemical Corp (FPCC) – the largest naphtha buyer in Asia – has halted production at its biggest cracker in Mailiao in end-May because of squeezed production margins. The cracker has an ethylene nameplate capacity of 1.2m tonnes/year.SINGAPORE (ICIS)--Asia’s naphtha spot prices are likely to stay soft in the short-term, undermined by a supply glut, squeezed margins and falling values of key petrochemical products amid a poor macroeconomic climate, market sources said on Monday.

Naphtha crack spreads have weakened, falling to $17.65/tonnee (€14.12/tonne) on 8 June, ICIS data showed, with one trader saying it is probably one of the lowest crack spreads on record.

Intermonth spreads are likewise falling, with the gap between the contracts for the second half of July and the second half of August at a $0.50/tonne contango on 8 June, compared with a $2.00/tonne backwardation a week earlier, ICIS data showed.

On Monday noon, however, prices of open-spec Asian naphtha contract for the second half of July were up by $36.00-37.00/tonne from Friday’s close at $783.00-786.00/tonne CFR (cost and freight), largely tracking gains in energy values.

At 13:45 Singapore time (06:45 GMT), US crude was up $1.99/bbl at $86.09/bbl, while Brent crude increased $2.10/bbl to $101.57/bbl.

Continued price pressures in China’s polyolefins market – Asia’s largest plastics resins market – are fuelling demand concerns in the coming month.

There are expectations that import prices of polyethylene (PE) and polypropylene (PP) into China may continue falling in July, in tandem with declines in the values of crude and feedstock olefins, notwithstanding the country’s recent measure to directly inject liquidity into its financial system via an interest rate cut.

The policy move, which is meant to boost the slowing Chinese economy, was largely ignored on 8 June, given a bigger concern that is the eurozone debt crisis.

Some regional cracker operators have started to reduce operating rates or even shut their facilities, causing a build-up of naphtha supply.

About 450,000 tonnes of arbitrage naphtha cargoes from Europe are also due to arriva in Asia next month that will exacerbate the supply overhang in the market.

“[Naphtha] prices have been decreasing. Sentiment is generally bad … just looking at the demand from the petrochemicals and the margins,” a Southeast Asian cracker operator said.

In the week ended 25 May, ethylene margins based on naphtha feed in northeast Asia fell to its lowest since March at $27/tonne, according to ICIS.

Margins recovered to $140/tonne last week as naphtha prices plunged more than ethylene values, according to ICIS.

Ethylene prices in Asia fell to $930-950/tonne CFR NE Asia in the week ended 8 June, down $40-60/tonne from the previous week, ICIS data showed.

Meanwhile, weak demand is also weighing down Asia’s butadiene (BD) spot prices. But prices are expected to bottom out in June, with a good chance of rebounding in July as supply tightens amid production cuts and shutdowns at some Asian crackers.

Spot BD prices was at $1,850-1,900/tonne CFR (cost and freight) northeast (NE) Asia in the week ended 8 June, unchanged from the previous week, according to ICIS.

Taiwan’s Formosa Petrochemical Corp (FPCC) – the largest naphtha buyer in Asia – has halted production at its biggest cracker in Mailiao because of squeezed production margins. The cracker has an ethylene nameplate capacity of 1.2m tonnes/year.

“With FPCC out of the picture, a significant amount of spot [naphtha] material will surface, compounding the oversupplied market,” a northeast Asian trader said.

UAE’s Abu Dhabi National Oil Co (Adnoc) has also issued tenders to sell a total of 125,000 tonnes of splitter and low-sulphur naphtha for early July loading, after failing to sell in full its term supply offers for July 2012 to June 2013.

However, some market players expect a reprieve from oversupply when Shell, a major supplier of naphtha, shuts its refinery next month.

Premiums fetched by both spot naphtha cargoes and tenders have weakened to negligible levels as most importers shy away from building up inventories, given uncertainty in global demand

South Korea’s Honam Petrochemical has bought three cargoes of 25,000 tonnes of naphtha for delivery into Yeosu in the first half of July at a premium of $3.00-4.00/tonne to Japan quotes CFR, down from a premium of $6.50/tonne fetched in the company's previous spot purchase of 50,000 tonnes for the same period of delivery.

“We may see discounts soon, if the market fundamentals continue to stay weak,” a northeast Asian cracker operator said.

India’s Oil and Natural Gas Corporation (ONGC) sold by tender last week 35,000 tonnes of naphtha for 16-17 June loading from Hazira at a premium of $22.00/tonne to Middle East quotes FOB (free on board), down from $51.00/tonne fetched in a previous tender for early June loading.

($1 = €0.80)

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

By: Ong Sheau Ling
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