INSIGHT: Supply crunch drives up Asia naphtha crack spreads, premiums

06 September 2012 15:59  [Source: ICIS news]

By Felicia Loo

SINGAPORE (ICIS)--Asia’s naphtha crack spread looks set to strengthen further as the current supply of the petrochemical feedstock may be insufficient to meet demand, leading to sharp spikes in premiums fetched by recent spot tenders and trades.

The regional naphtha market seems to defy the generally bearish sentiment in the downstream petrochemical industry, which is turning increasingly worried over China’s economic slowdown.

There are fears that premiums on trades will continue to shoot up once Formosa Petrochemical Corp (FPCC) of Taiwan – the biggest buyer of spot naphtha in Asia – returns to the spot market to procure cargoes.

The naphtha crack spread for the second-half October contract widened to a four-month peak of $142.60/tonne on 5 September, from $140.10/tonne in the previous day, ICIS data show.

The crack spread against October Brent crude futures was at its strongest levels since 24 April when the crack spread stood at $149.30/tonne, according to the data.

Asia's open-spec naphtha prices closed at $996-998/tonne CFR (cost and freight) Japan on Wednesday.

The price backwardation continues to deepen, reflecting the strength of a market facing extremely low supply, the result of plunging naphtha availability from major suppliers in India, traders said.

“Supplies are very tight. It [the rising crack spread] is largely supply-driven,” said a trader, adding that Asia is structurally short on naphtha.

The backwardation between the second half of October contract and the second half of November contract steepened to $15.00/tonne, compared with $11.00/tonne at the start of the trading week. The backwardation is the widest since 27 March, the ICIS data show.

The wider the backwardation, the stronger the front-month market.

Compounding the situation is limited deep-sea supply from northwest Europe and the Mediterranean, because of a weak east-west spread, traders said.

Some European naphtha cargoes are heading to the US, where strong gasoline prices are pulling naphtha into the gasoline blending pool, they added.

Demand, on the other hand, remains firm as crackers in South Korea continue to run at full capacity, traders said.

“The Korean end-users are still buying heavily in October. Their October requirements are about 40 cargoes,” said one trader.

A typical open-spec cargo is 25,000 tonnes.

Premiums on naphtha spot trades and tenders continue to rise, underscoring the robust fundamentals, traders said.

South Korea’s LG Chem bought 50,000 tonnes of spot naphtha for delivery in the second half of October at premiums near $20/tonne on Wednesday, forking out strong premiums of $18.50/tonne and $19.25/tonne to Japan quotes CFR. 

In the first half of the week, South Korea’s Honam Petrochemical bought two naphtha cargoes totalling 50,000 tonnes for delivery in the second half of October at a higher premium than its previous purchases because of tight supply.

Honam paid a premium of around $11/tonne to Japan quotes CFR for the naphtha cargoes to be delivered to Daesan and Yeosu. It previously bought a first-half October cargo of similar volume bound for Daesan at a premium of $9.50-10/tonne to Japan quotes CFR.

India’s Mangalore Refinery and Petrochemicals Ltd (MRPL) sold by tender 35,000 tonnes of naphtha for loading early October to Total at a lofty  premium of $42/tonne to Middle East quotes FOB (free on board).

MRPL previously sold by tender 35,000 tonnes of naphtha to PetroDiamond at a premium of around $33.50/tonne Middle East quotes for 17-19 September loading.

Similarly, Indian state-owned refiner Oil and Natural Gas Corp (ONGC) sold by tender 35,000 tonnes of naphtha for loading from Hazira on 23-24 September at a much higher premium.

Chinese trading firm Unipec won the ONGC naphtha cargo at a premium of $39/tonne (€31/tonne) to Middle East quotes FOB.

In its previous tender, ONGC sold 35,000 tonnes of naphtha for loading from Hazira on 10-11 September at a premium of $23.50/tonne to Middle East quotes FOB.

Indian refiners are estimated to have slashed naphtha exports to 500,000-600,000 tonnes in September, down by 29-33% from a monthly average of 700,000-900,000 tonnes, because of higher domestic demand for the petrochemical feedstock.

Some refinery maintenance prompted a reduction in naphtha output in India, limiting volumes for exports.

The buoyant naphtha market brought cheers to Middle East refiners, with their spot sales this week fetching sharply higher premiums, traders said.

Kuwait Petroleum Corp sold by tender 24,000 tonnes of light naphtha and 50,000 tonnes of full range naphtha for loading in early October, at premiums of $38-39/tonne to Middle East quotes FOB (free on board), while Abu Dhabi National Oil Company (Adnoc) sold 50,000 tonnes of naphtha for loading in the first half of October, at a premium of around $38-40/tonne to Middle East quotes FOB.

Previously, the premiums done in other Middle East naphtha spot trades hovered in the $20s/tonne levels to Middle East quotes FOB, traders said.

“If Formosa starts buying spot [naphtha] for October, the market will rally even further,” said one trader, referring to Taiwan’s FPCC.

FPCC typically mops up at least 300,000 tonnes of naphtha on a monthly basis from the spot market, traders said.

But the company has been shunning naphtha purchases for months because of cracker turnaround issues.

It has recently raised the operating rates at its 700,000 tonne/year No 1 cracker at Mailiao to 95% capacity from 85% previously.

Its 1.03m tonne/year No 2 cracker in Mailiao is currently undergoing maintenance, while FPCC’s 1.2m tonne/year No 3 cracker at the same site is running at full capacity.

However, there are concerns over the strength of the naphtha market that may inadvertently chip away margins as downstream markets are far from bullish, traders said.

Asian styrenic resin prices are stagnating despite suppliers’ efforts to boost them amid persistently poor demand, with outlook for the next few weeks remaining bearish.

Spot prices of polystyrene (PS) have remained largely below $1,600/tonne CFR China since early April, while acrylonitrile-butadiene-styrene (ABS) prices have stayed below $2,000/tonne CFR NE (northeast) Asia since mid-August.

Producers’ attempts to raise prices have been derailed since mid-August because weak economic conditions in the US and the eurozone this year have curbed demand for Asian finished goods, thereby reducing the consumption of styrenic resins.

China, the world’s second largest economy and the most significant petrochemical importer in Asia, has entered the final stages of its peak manufacturing season for exports in the third quarter, with no material improvement in demand.

China's Purchasing Managers Index (PMI) for August dropped to a nine-month low of 49.2%, mainly dragged down by weak external demand.

Dwindling demand from the debt-ridden eurozone has weighed heavily on Chinese exports and this, in turn, has had a negative impact on other Asian economies, including Japan, South Korea and Taiwan, which count on the strength of Chinese demand for raw materials for production.

Taking a cue from lower margins, Japanese chemical producer Maruzen Petrochemical trimmed the operating rate at its 520,000 tonne/year naphtha cracker at Chiba to 85% this month from 86-87% in August.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections

By: Felicia Loo

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