FocusAsia naphtha crack spread to slide on supply, low cracker ops

15 April 2013 03:30  [Source: ICIS news]

By Felicia Loo

Asia naphtha crack spread to decline furtherSINGAPORE (ICIS)--Asia naphtha crack spread may be further undermined by a supply deluge and as petrochemical demand weakens in the second quarter, traders said on Monday.

Lower cracker runs in Asia compounded the situation, along with an armada of deep-sea inflows from the western markets which may not be able to find demand outlets easily, they added.

“It is not easy to find buyers. Once May passes, most Asian refiners will complete their refinery maintenance and there will be more supply within the region,” one trader said.

The naphtha crack spread was assessed at $82.90/tonne (€63/tonne) against May Brent crude futures at the close of trade on 12 April, down from $98.08/tonne in the previous week, according to ICIS data.

Meanwhile, open-spec naphtha prices slumped to $858-860/tonne CFR (cost & freight) Japan on 12 April – the lowest since 30 July 2012 when prices closed at $852-854/tonne CFR Japan, it showed.

The naphtha backwardation narrowed to $11/tonne on 12 April as compared with $17/tonne in the previous week.

The pressure on Asian naphtha is mounting given the dismal downstream markets, traders said.

Benchmark ethylene prices fell by $20-30/tonne to $1,240-1,280/tonne CFR NE (northeast) Asia in the week ended 12 April, owing to ample stocks and poor margins in the ethylene derivative markets, ICIS data showed.

Polyethylene prices declined in the week ended 12 April, down by $10-15/tonne to $1,335-1,390/tonne CFR China in response to the weak buying sentiment, it further indicated.

The PE market outlook was weak, with prices expected to fall further when Asian and Middle East producers return to offer cargoes for May shipment, according to ICIS.

Asian and Middle Eastern polyethylene and polypropylene producers are expected to cut their offers into China for May cargoes late this month amid weak buying sentiment.

Demand is typically weak in the first half of May, while new capacity that will come on stream in China in the near term is expected to further weigh on polymer prices.

Prices have been falling since mid-February because of weak downstream demand and soft feedstock prices. Some importers may delay restocking activities to June, when new PE and PP plants in China start up, traders said.

Upstream, the Asian naphtha market became the magnet to pull in the western arbitrage flows, with an accumulated 300,000 tonnes of US naphtha expected to land in Asia in May, an unusually high volumes coming from the US.

In normal times, Asia typically receives 30,000-100,000 tonnes of US naphtha material.

All in all, an estimated total volume of 1.0-1.1m tonnes of deep-sea naphtha supply from northwest Europe, the Mediterranean, Russia and the US will land in Asia in May, similar to the levels in April, and the influx of the heavy naphtha material will be taking place during a time when petrochemical demand is on a decline.

Some market participants said that Asia would not be able to continuously absorb such huge volumes and potential demurrage costs may have to borne out until June.

Market sentiment was further hit amid further cracker run cuts and relatively low operating rates, traders said.

South Korea’s Yeochun NCC (YNCC) cut its run rates further at its Yeosu-based crackers to 85% capacity since early April, a company source said last week.

YNCC reduced the operating rates across its three naphtha crackers to 90% capacity last month, following a blast at a polyethylene (PE) storage tank at Daelim Industrial Co’s plant at the same site.

The downstream unit at Daelim is expected to stay shut until the end of May, prompting the rate reduction for YNCC, a regular supplier of ethylene to Daelim, the source added. YNCC’s three crackers - with a combined ethylene nameplate capacity of 1.9m tonnes/year - were running at 100% capacity prior to the incident.

Japan’s Mitsubishi Chemical is maintaining a relatively low cracker rate of 85-90% capacity in April, unchanged from the levels in March, a company source said on 11 April.

Spot naphtha premiums are already sliding in response to the abundant supply, and they will continue to face downward pressure, traders said.

South Korea’s Lotte Chemical Corp has bought 50,000 tonnes of naphtha for delivery to Daesan in the second half of May.

The deal for the cargoes was done at a premium of around $17.50/tonne to Japan quotes CFR. Lotte last bought 75,000 tonnes of naphtha for delivery to Daesan in the second half of May, at a premium of $22/tonne to Japan quotes CFR.

However, on the flip side, falling naphtha prices will encourage end-users to stick to using naphtha feedstock instead of butane, market participants said.

“Naphtha prices have lowered. The LPG [liquefied petroleum gas] difference with naphtha is not too wide, so it’s normal for some players to use naphtha solely,” said one trader.

Additional reporting by Peh Soo Hwee and Chow Bee Lin

($1 = €0.76)

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

By: Felicia Loo

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