NE Asia crackers margins high on strong ethylene, soft naphtha

28 August 2014 05:30 Source:ICIS News

Focus story by Yeow Pei Lin and Felicia Loo

NE Asia ethylene margins move upSINGAPORE (ICIS)--Northeast Asian cracker operators are enjoying strong margins of around or above $400/tonne this month on the back of weaker feedstock naphtha costs and strong ethylene spot prices, which are likely to stay high in months ahead, market participants said on Thursday.

Ethylene weekly spot prices rose to a multi-year high of $1,560-1,570/tonne CFR (cost & freight) NE (northeast) Asia in early August due to tight regional supply caused by several major cracker turnarounds in Japan, Taiwan and South Korea between mid-August and October, according to ICIS data.

Prices subsequently eased to the mid $1,500s/tonne CFR NE Asia in the second half of August on persistently weak downstream demand, increased Chinese domestic supply and the availability of arbitrage cargoes.

But most market players, including buyers, do not expect ethylene prices to see a sharp correction in the near term.

On the other hand naphtha prices have hovered around $900/tonne range throughout August, enabling cracker operators to profit from wide margins.

Open-spec first-half October naphtha rose by $1.50-2.50/tonne to $903-906/tonne CFR Japan on Tuesday though the intermonth spread weakened at the close of trade on 25 August, ICIS data showed.

The spread between the first half of October and first half of November spread narrowed to $1.00/tonne in backwardation on 25 August from a backwardation of $1.50/tonne on 22 August, the data indicated.

Ethylene spot market in northeast Asia started the month on a strong note ahead of the maintenance shutdown of several crackers operated by the region’s major suppliers.

Deals for second-half August/early-September shipments were done at above $1,550/tonne CFR NE Asia.

Market sources expect the supply for September to tighten further as three major northeast Asian crackers will be shut concurrently next month.

Taiwan’s Formosa Petrochemical Corp (FPCC) has already shut its 1.2m tonne/year cracker in Mailiao on 15 August for around 45 days.

Tonen General Sekiyu commenced a turnaround at its 515,000 tonne/year Kawasaki cracker on 14 August, five days earlier than planned. The production loss led the producer to cut its August exports, worsening the already tight supply conditions in Asia, market sources said.

South Korea’s YNCC will shut its 465,000 tonne/year Yeosu cracker on 23 September for around a month of maintenance.

The three producers are expected to suspend or reduce exports during August and September as a result of their reduced production, market players said.

“Some vessels are idling due to the tight supply. We may have no choice but to accept high FOB prices in order to deploy the vessels,’’ a regional trader said.

The high FOB NE Asia costs have led traders to target the mid-high $1,500s/tonne CFR NE Asia for September shipments to end-users.

However, buyers in China and Taiwan are lobbying for lower prices in view of the recent weakness in naphtha costs, and persistently weak downstream margins for several derivatives ranging from polyethylene (PE), styrene monomer (SM) and vinyls.

“Cracker operators are enjoying very good margins especially with naphtha at such low levels now.  But margins for end-users like us are negative. It’s time they (producers) lower their prices,’’ a Chinese SM producer said.  

Increased domestic supply in China on the back of widespread production cuts at PE facilities has also given buyers the option to source for material locally, Chinese players said.

A major China state-owned company has surplus volumes to offer domestic customers for August and September delivery as a result of its downstream production cuts, they added.

Northeast Asian buyers expect ethylene prices to soften from October as FPCC and Tonen General Sekiyu would have completed their cracker turnarounds by the end of next month.

“Supply in the region will start to improve in October as some of the cracker turnarounds in Taiwan and Japan will complete. This is reflected in the offers for arbitrage cargoes,’’ a Chinese buyer said.

Europe-origin cargoes for end-October/early-November delivery were offered at lower prices than the regional supply for September delivery during the week ended 22 August.

However, several market participants said prices are unlikely to see a massive decline in the fourth quarter as the regional supply will likely continue to be constrained by a few turnarounds at crackers in South Korea and Japan, and a long shutdown of around three months at Shell’s 800,000 tonne/year facility in Singapore from October. 

“We see the possibility of northeast Asian supply being pulled down south due to Shell’s cracker turnaround,’’ a trader said.

Naphtha on the other hand is not expected to see major gains in weeks ahead owing to ample supply and slower demand.

As much as 1.4m tonnes of deep-sea naphtha inflows are expected to arrive in Asia in October, traders said.

The volumes were on top of the 2.0m tonnes of arbitrage naphtha imports slated for September arrivals in Asia, the traders said. The deep-sea inflows hail from northwest Europe, the Mediterranean, Russia and the US.

“Naphtha is bearish. There are a lot of arbitrage cargoes coming in,” said one trader.

Meanwhile, demand is seen sliding amid a slew of cracker turnarounds.

There was hardly any spot buying from end-users in northeast Asia over the past week.

Japan’s Idemitsu Kosan is slated to take offline its 623,000 tonne/year cracker in Tokuyama for around 6 days starting from 10 September.

Japan’s Mitsui Chemicals will take offline its 617,000 tonne/year Chiba-based cracker in October for around two weeks. 

Meanwhile, weak Chinese economic data also signalled slower demand in the petrochemical segment.

HSBC’s flash manufacturing purchasing managers’ index (PMI) for China declined sharply to a three-month low at 50.3 in August, from 52.0 in July, the investment bank said.

ICIS ethylene margin graph

Source: ICIS margin report

Additional reporting by Felicia Loo

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

By Yeow Pei Lin