FocusTight supply, firm demand to support Asia naphtha crack spread

25 October 2012 06:10  [Source: ICIS news]

By Felicia Loo

SINGAPORE (ICIS)--Asia’s naphtha crack spread will be supported by tight availability of cargoes from the Middle East and Europe, as well as healthy demand from South Korean and Taiwanese cracker operators, traders said on Thursday.

The strong supply/demand fundamentals of the petrochemical feedstock allow the market to shrug off weakness in downstream plastics sector for the time being, they said.

At the close of trade on 24 October, the Asian naphtha crack spread widened to $131.05/tonne (€100.91/tonne) against December Brent crude futures – the strongest for the third successive trading session, ICIS data showed.

On Thursday morning, open-spec naphtha prices for the first half of December contract stood at $940.00-943.00/tonne CFR (cost and freight) Japan, while the intermonth spread between the first-half December and the first-half January contracts was at a steep backwardation of $15.00/tonne on Wednesday’s close, according to ICIS data.

“The low [naphtha] inventory is making end-users nervous,” said a buyer in northeast Asia.

October-loading naphtha shipments bound for Asia from the Middle East are estimated to be 2.8m-2.9m tonnes, down from the regular monthly shipments of 3.2-3.3m tonnes, traders said.

Besides, limited deep-sea supply from northwest Europe and the Mediterranean continues to cause jitters among end-users, traders said.

The weak East-West spread of $2.00/tonne suggested that the arbitrage window remains firmly shut, they said.

It will not be a cinch to find prompt cargo supply, leading to near record-high premiums being paid in spot tenders and trades throughout the week, they said.

South Korea’s Honam Petrochemical bought 50,000 tonnes of spot naphtha at a premium of $18.50/tonne to Japan quotes CFR for delivery to Daesan in the first half of December.

In its previous spot purchase, Honam bought 75,000 tonnes of naphtha at a premium of around $16.00/tonne to Japan CFR quotes for delivery to Yeosu and Daesan in the second half of November.

Another South Korean chemical company LG Chem bought 25,000 tonnes of spot naphtha at a premium of $17.50/tonne to Japan quotes CFR for delivery to Daesan in the first half of December.

In its previous spot purchase, LG bought 50,000 tonnes of naphtha at a premium of $14.50/tonne to Japan quotes CFR for delivery in the second half of November.

Indian Oil Corp (IOC) sold by tender 35,000-40,000 tonnes of naphtha for loading from Dahej on 16-18 November, at a premium of $42.00/tonne to IOC pricing formula on a free on board (FOB) basis.

IOC previously sold by tender 35,000 tonnes of naphtha for loading from Dahej at a premium of $30.00/tonne to IOC pricing formula on a FOB basis for loading on 25-27 October.

India’s Bharat Petroleum Corp Ltd (BPCL) sold by tender two 35,000-tonne naphtha cargoes for loading from Mumbai in the second half of November.

The deal for the cargo for loading on 15-17 November was awarded to STO Maldives at a premium of $38.00-39.00/tonne to Middle East quotes FOB. Marubeni won the second cargo at a premium of $35-36/tonne to Middle East quotes FOB for loading on 25-27 November.

In its last tender, BPCL sold 30,000 tonnes of naphtha to Chinese trader Unipec at a premium of $26/tonne to Middle East quotes FOB for loading from Mumbai on 29-31 October.

Taiwan’s Formosa Petrochemical Corp (FPCC) is planning to seek spot naphtha supply for delivery to Mailiao in the first half of December as it plans to raise operating rates at its three crackers to 90% from 1 November, up by 10 percentage points from October rates.

Two weeks ago, FPCC bought at least 30,000 tonnes of spot naphtha at a premium of below $10/tonne to Japan quotes CFR for delivery to Mailiao in the second half of November, traders said.

Higher run rates at FPCC’s three crackers with a combined ethylene capacity of 2.93m tonnes/year will be implemented in line with the restart of a downstream monoethylene glycol (MEG) plant in Mailiao.

Even as Indian refiners are boosting November naphtha exports to 800,000 tonnes from 720,000 tonnes in October, Asia, being structurally short on naphtha, is facing a situation where demand is outpacing supply at this juncture, traders said.

“Now, Asia is attracting barrels from the US,” said one trader.

US naphtha flowing into Asia is an unusual arbitrage route, according to market players.

The tight cargo availabilities provide strong support to naphtha prices in spite of plans by downstream South Korean polypropylene (PP) producers to cut output in November if their margins get squeezed further.

Integrated PP margins in northeast Asia were estimated at minus $19/tonne last week, moving deeper into negative territory from minus $4/tonne in the previous week, because of lower PP prices, according to ICIS data.

Prices of the benchmark PP flat yarn fell by $20-30/tonne week on week to $1,390-1,430/tonne CFR China on 19 October, ICIS data showed.

Asian ethylene prices, on the other hand, stood at $1,350-1,370/tonne CFR NE (northeast) Asia versus $1,300-1,350/tonne CFR NE Asia four weeks ago, ICIS data stated.

“The naphtha market is still very strong. Supply is very tight,” said a trader.

($1 = €0.77)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections
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By: Felicia Loo

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