Asia naphtha backwardation seen firming on healthy demand

Focus article by Felicia Loo

SINGAPORE (ICIS)–Asia’s naphtha backwardation is expected to widen on the back of firm regional demand, as well as prospects of lower deep-sea arbitrage supply, traders said on Monday.

At midday, open-spec naphtha prices were at $435.00-436.00/tonne CFR (cost and freight) Japan, down by 50 cents from 23 January in tandem with global crude futures.

However, in a sign of a market rebound, the naphtha intermonth spread had flipped into backwardation for the first time since 9 December 2014.

The intermonth spread between first-half March and first-half April contract was assessed at a backwardation of $3.50/tonne during the week ended 23 January, compared with a contango of $1.00/tonne in the previous reporting week, ICIS data showed.

The intermonth spread between second-half March and second-half April was assessed at a backwardation of $2.50/tonne, compared with a contango of $1.00/tonne over the same period.

“The crackers are running quite well overall,” said one trader.

Taiwan’s Formosa Petrochemical Corp (FPCC) plans to increase the run rates at its three Mailiao crackers to around 95% in February, amid improved cracker margins and better propylene market conditions, a company source had said.

The producer lowered on 1 January the operating rates at the crackers to 90% from 100% in December due to a generally weak olefins export environment late last year.

FPCC’s three crackers in Mailiao have a combined ethylene capacity of 2.93m tonnes/year.

Another Taiwanese cracker operator, CPC Corp, has increased the run rates at its two crackers in Kaohsiung to around 100% this week, from 85% earlier in the month, a company source had said.

Production at its No 4 cracker and No 6 crackers has been raised in order to meet the domestic demand for propylene, the source said.

Meanwhile, crackers in South Korea are being operated at full tilt as margins are deemed healthy.

The ethylene margin using naphtha feed rose during the week ended 26 January to $366/tonne from $349/tonne during the week ended 16 January, ICIS weekly margin report showed.

Demand has strengthened as end-users sought the material actively in recent weeks.

China’s trading firm Unipec, along with Taiwan’s FPCC and CPC Corp, have secured cargoes in the spot market, and their purchases have helped to underpin the price differentials.

India’s Bharat Petroleum Corp Ltd (BPCL) has sold by tender 35,000 tonnes of naphtha for loading from Mumbai on 12-14 February at a stronger premium.

The deal of the cargo – which was awarded to trading firm PetroDiamond – was done at a premium of $11-12/tonne to FOB Middle East quotes.

Supply wise, the arbitrage economics for Asia to import US naphtha has ceased to be viable, with the window of opportunity shut for the time being, traders had said.

Last week, the east-west spread – a price measure for the arbitrage window – narrowed to $26.25/tonne for February.

The east-west spread for March was indicated at $25.50/tonne.

In the week earlier, the February east-west spread was stronger at $33.50/tonne and in early January, the spread was pegged at $36-38/tonne.

Downstream, propylene prices in northeast Asia rose by $60-70/tonne to $815-875/tonne CFR NE Asia during the week ended 23 January.

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