Market Intelligence: Asia naphtha lifts

24 March 2014 00:00 Source:ICIS Chemical Business

While a slowing China economy weighs on plastics demand, naphtha in Asia may find some respite given burgeoning blending demand from the gasoline pool in Asia and in Europe.

Deep sea naphtha availability may tighten further as gasoline blending demand increases underpin naphtha prices in Asia, traders said in the week ending 14 March.

At this juncture, the arbitrage economics to move naphtha from western Europe to Asia are not favourable, with the east-west spread capped at around $17/tonne for April, they added.

“The arbitrage [window] is closed so there is some effect of tight feeling,” said one trader.

Asia Naphtha

Naphtha price backwardation between the second half of April and the second half May contracts widened to $11/tonne on 12 March, the strongest levels since 4 February when the spread was at a backwardation of $11.50/tonne.

For April, Asia is expected to receive close to a million tonnes of deep-sea supply from northwest Europe, the Mediterranean, Russia and the US.

The volumes paled in comparison with 1.6m-1.7m tonnes of arbitrage naphtha imports in March.

While spot naphtha buying is subdued because of a heavier slate of cracker maintenance from February to June this compared with the same period in 2013, gasoline blending demand is providing a fillip to naphtha prices.

The motor gasoline (mogas) crack has hit above $10/bbl for the first time in eight months, signalling that gasoline blending could pick up in the next few months.

In Asia, Vietnam’s sole refinery, the 140,000 bpd Dung Quat plant, is scheduled for maintenance from May to July. This will lead to an increase in gasoline imports and higher blending demand. Vietnam is Asia’s second-biggest gasoline importer after Indonesia.

Indonesia will buy more gasoline overseas ahead of its presidential election in July, thus boosting naphtha usage as a blending component. Elsewhere, robust gasoline demand in West Africa is drawing European gasoline imports, which in turn has bolstered the use of European naphtha in gasoline blending, and as a consequence naphtha exports to the east of Suez are being reduced.

The forward April curve for gasoline blending margins has hit $100/tonne, compared with $60/tonne for March. They were a far cry from January blending margins of less than $20/tonne in Europe, traders said.

Naphtha will also get a boost as the US starts to stockpile summer gasoline supply ahead of the summer driving season which begins around late May.

That may further curtail arbitrage naphtha supply bound for Asia, as European refineries will gear up to increase gasoline production partly for the US markets.

US finished motor gasoline inventories plummeted for the week ended 7 March as refiners got rid of winter grades in order to switch to the seasonal spring grade of gasoline, the US Energy Information Administration (EIA) said on 12 March.

Gasoline inventories fell by 5.2m bbl to 223.8m bbl for that week, against analysts’ expectations for a drop of approximately 2.1m bbl.

US gasoline consumption rates moved higher that same week, gaining 6.4%, while gasoline production was 176,000 bbl/day lower at 9.203m bbl/day. Meanwhile, refinery utilisation rates fell to 86.0% from 87.4% the week before. In Asia, spot premiums have strengthened, a sign of a firming naphtha market.

CRACKER TURNAROUND SEASON

However, the gains in naphtha prices may be limited amid heavy cracker turnarounds.

In Japan alone, six naphtha crackers with a total capacity of around 3.4m tonnes/year will be taken off line for maintenance between February and June, compared with two plant shutdowns in the country during the same period last year.

Some crackers are using more liquefied petroleum gas (LPG) as partial feedstock, as fading demand at the tail end of the winter season put downward pressure on LPG prices.

South Korea’s LG Chem is running its two crackers at full capacity and partially on LPG partially. It has a 1m tonne/year cracker in Yeosu and a 940,000 tonne/year cracker in Daesan.

The absence of major spot naphtha buyer Formosa Petrochemical Corp (FPCC) further weighs on the market. While Taiwan’s FPCC is operating its three crackers in Mailiao at full tilt, it is using more LPG as feed. It has a 1.2m tonne/year No 3 cracker, a 1.03m tonne/year No 2 cracker and a 700,000 tonne/year No 1 cracker at the site, according to ICIS data.

The crackers are using LPG for up to a fifth its total feed, with naphtha dominating the rest. As such, FPCC is not seeking any spot naphtha requirements for delivery in April. Downstream, though ethylene is thriving, the rest of distribution chain seems to be struggling, market participants said.

“C3 and C4 are under heavy pressure now in Asia. Only C2 is doing well,” one participant said.

Ethylene prices are firming in response to tighter supply at a time of active cracker maintenance. Ethylene spot prices in northeast Asia extended gains in the week ended 7 March to $1,490-1,510/tonne CFR NE (northeast) Asia, rising by $10/tonne from the week ended 28 February, according to ICIS. Four week ago, ethylene prices stood at $1,470-1,500/tonne CFR NE Asia.

In southeast Asia, spot ethylene prices stood at $1,450-1,460/tonne CFR SE (southeast) Asia on 7 March, stable week on week but higher than $1,400-1,420/tonne CFR SE Asia four weeks before.

However, as the Chinese economy slows, there are concerns over how downstream petrochemical and polymer markets will perform and the impact of that performance on naphtha demand for steam cracking.

China’s propylene buyers have remained bearish following unexpected surplus prompt supply from several regional producers, with CFR NE Asia prices assessed at $1,440-1,450/tonne compared with $1,460-1,485/tonne four weeks ago.

In February, manufacturing activities in China slowed, with the purchasing managers’ index (PMI) for the month falling to an eight-month low of 50.2, according to data released by the China Federation of Logistics & Purchasing (CFLP).

The level was barely above the 50 threshold that indicates expansion, as new orders and new export orders weakened.

Investment bank HSBC’s final February PMI for China contracted month-on-month with the reading at 48.5, down from 49.5 in January.

By Felicia Loo