17 January 2014 12:45 [Source: ICIS news]
“Asia is weakish still and hence pushing Europe down with it,” said one trader.
Weak domestic petrochemical demand combined with poor gasoline uptake has left the European naphtha market dependent on exports to Asia over the past few weeks.
Late on Friday morning, the northwest European cargo prices weakened to $897-899/tonne CIF (cost, insurance & freight) NWE (northwest Europe), down from $922-924/tonne at the close of trade on 10 January, ICIS data showed.
The European naphtha differential over ICE Brent crude oil futures fell to a two-month low on Thursday, dropping from minus $4.20/bbl on Wednesday morning to minus $5.45/bbl on Thursday morning.
Meanwhile, ICE Brent crude futures were trading around the $106/bbl mark for the most part when the above naphtha prices were assessed, taking upstream volatility out of the picture.
Earlier today in Asia, the first-half March open-spec prices weakened to $933.00-936.00/tonne CFR (cost & freight) Japan, down from $975.50-977.50/tonne CFR Japan at the close of trade on 10 January.
"The sentiment is more bearish in the east as they are concerned about arb volumes coming their way and the crackers turnaround season around the corner," a second trader said.
Japan, a key Asian export destination for Europe, is due for a heavy cracker maintenance schedule from February to June, with six naphtha crackers due to be taken off line for maintenance.
A third European naphtha trader said on Thursday: "[The crack] is ticking down further. Still support in the east but heavy selling in the eastern window."
The arbitrage window to Asia was technically open this week, with the price spread between Europe and Asia at $17/tonne for February swaps late on Tuesday morning, but traders lost confidence in the possibility of product uptake in the weaker Asian market.
While dependent on factors such as freight rates, a minimum spread of $15-20/tonne is generally considered to be necessary for an arbitrage window to open east.
Naphtha volumes are moving from the Mediterranean to Asia, unlike from the northwest Europe. "It does from the Med, this [Asian weakness] hasn't affected the Med yet," the second trader said.
Lack of availability of ships to book volumes to Asia was exacerbating the situation in northwest Europe, the second trader added: "There are no ships to arb the length to the east. All [have been] used by dirty products, mainly fuel [oil]."
Alternative feedstock propane was trading at a discount of $90/tonne to naphtha on Friday, while the February swaps price spread stood at $80/tonne, widening from $60/tonne last week, making it the feedstock of choice for petrochemical producers in Europe.
In general, steam crackers in Europe are set up to switch only 25% of their production to LPG. Nevertheless, there is a huge variation as newer crackers often have more flexibility in switching between the feedstocks, while older crackers are often unable to crack propane.
"It is already below the turning point, meaning petchem will buy propane. It [Propane price] is extremely volatile, there is a cold wave, then no cold wave. Petchem had stopped buying [propane] end November, early December so December was much better than expected in naphtha terms. Now it is back to propane."
Poor gasoline demand from the US has added to the length in Europe, which has resulted in at least 200,000 surplus volumes in northwest Europe alone, the second trader said.
The first trader said: "Europe is long and will have to price according to the markets that take our tonnes."
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