Asia naphtha extends gains on strong Europe gasoline blending

Focus story by Felicia Loo

SINGAPORE (ICIS)–Asia’s naphtha prices may continue rising on the back of tight supply amid high run rates at regional crackers and strong gasoline blending in Europe, traders said on Tuesday.

Open-spec first-half July naphtha rose by $2-3/tonne from Monday levels to $980-983/tonne CFR Japan on midday Tuesday, while the naphtha crack spread versus July Brent crude futures widened to $153.63/tonne on Monday from $148.73/tonne on 23 May, ICIS data showed.

Rising naphtha prices, however, are prompting cracker operators in Asia to raise the proportion of liquefied petroleum gas (LPG) in their feed mix, traders said.

The intermonth spread between first-half July and first-half August naphtha contracts was quoted at a backwardation of $18.50/tonne on Monday, compared with $14.00/tonne in backwardation a week ago, it indicated.

Strong gasoline blending in Europe has been the main factor fuelling the bull run in Asian naphtha prices, which have seen wild swings in the past few weeks, traders said.

“It’s more gasoline led than anything. [Asian naphtha] is led by the West,” said one trader.

The West African market has been pulling a lot of gasoline from the Mediterranean, which drains off [naphtha] cargo availabilities, traders said.

“The blending market is still absorbing grade specific naphtha,” the trader said.

As a consequence, the arbitrage naphtha flows to Asia remained tight, with June arrival-cargoes estimated to be 1.0m-1.1m tonnes, the traders said.

Asia’s deep-sea imports typically hail from northwest Europe, the Mediterranean, Russia and the US.

“The arbitrage cargoes may decrease and naphtha supply will be tighter,” said another trader.

In southeast Asia, supply of blend grade naphtha is also tight because Indonesia has been stockpiling gasoline since April ahead of the Muslim fasting month of Ramadan in end-June.

Indonesia’s state-owned Pertamina is the largest diesel and gasoline buyer in Asia, with imports meeting a third of the country’s total demand.

Meanwhile, with naphtha prices heading north, major cracker operators in Asia are reacting by increasing the use of LPG as feedstock given its competitive pricing.

For June alone, the Asian crackers have collectively bought around 350,000 tonnes of LPG, the traders said.

High cracker runs dominated the Asian petrochemical scene, indicating stable demand.

China imported a combined polyethylene (PE) and polypropylene (PP) volume of 1.15m tonnes in April, representing an 18.0% increase from the same period last year. Its PP imports in April stood at 398,400 tonnes, up by 0.6% month on month, and up by 14.4% year on year. PE imports last month, on the other hand, totalled 752,600 tonnes, down by 0.1% from March but up by 20.0% from the same period in 2013.

A caveat remains however bullish the Asian naphtha market is, as the lure of LPG will temper the price gains.

While South Korea’s Lotte Chemical is running its two crackers – a 1m tonne/year cracker in Yeosu and a 1.07m tonne/year cracker in Daesan – at full capacity, it is cracking 7-15% of its total feed on LPG, with naphtha making up the remaining 85-92%.

Lotte uses around 600,000 tonnes/month of naphtha and 40,000 tonnes/month of LPG, said one source familiar with the situation.

Since early May, Lotte has switched to using more LPG from naphtha as a feed at its crackers on account of LPG’s cost advantage, a company source had said. It may continue to use LPG for the next three to four months, the source said.

In Japan, Mitsui Chemicals is currently operating its 617,000 tonne/year cracker in Chiba and 450,000 tonne/year cracker in Osaka at 90-95% of capacity, a source close to company said.

The two crackers are using naphtha as 90% of feed, while LPG makes up the remaining 10%.

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