Europe naphtha uptake high despite decline in cracker margins

Focus article by Cuckoo James

LONDON (ICIS)–European open-spec naphtha uptake is still high among petrochemical producers despite a decline in cracker margins, industry sources said on Thursday.

Higher upstream costs pressured European naphtha contract cracker margins down by €44/tonne in the week ending 13 February, their lowest since November 2013, according to ICIS margin analysis.

The previous week’s ICIS cracker margin analysis showed a 41% and 47% drop in spot and contract cracker margins respectively, primarily on the back of feedstock naphtha gains combined with February ethylene contract price (CP) reductions.

A naphtha trader said: “That is quite bearish news for naphtha and LPG.” However, expectations are high this will be corrected in March, leaving petrochemical producers with little incentive to drastically cut back on cracker run rates, naphtha traders said.

A second naphtha trader said: “Hardly surprising [drop in cracker margins] with the rally in crude, but will be corrected in March though.”

The fall in margins has not stopped petrochemical producers from stocking up on naphtha, traders said. “[Margin erosion] is interesting as they are all really buying a lot of naphtha,” a third naphtha trader said.

The real driver behind the buying could be that cracker margins are expected to rise next month as long as olefins contract negotiations result in a rise in values, the third trader said.

“Hearing the negotiations for next month will mean a rise in prices so margins will improve,” the third trader said.

“It is more interesting to see what the spot [cracker] margin looks like if you want to gauge the market,” the second trader added.

Last week, naphtha-based spot margins declined by €24/tonne on the rise in naphtha costs which offset a $28/tonne increase in spot ethylene prices and 1.7% higher co-product credits, according to ICIS margin analysis. Contract margins have a €118/tonne premium over spot margins.

The fall in spot cracker margins are therefore lower than in contract cracker margins.

Bids in the open market for open-spec naphtha are high. “Demand still seems to be there because they are running hard and making money [also as they] have bought less LPG this month,” the second naphtha trader said.

The naphtha-propane spread has been more favourable to naphtha this year. However, the spread widened recently to three-digit figures. The spread was noted at $110/tonne for March cargoes.

The third trader said: “But they seem to have great demand for both propane and naphtha.”

However, “they should buy a bit less naphtha and more propane next month if the price spread stays where it is”, the second trader said.

Meanwhile, despite a healthy uptake of open-spec naphtha in the window, petrochemical producers are nonetheless cautious about how much ethylene they produce – keeping away from naphtha grades that yield relatively more ethylene, traders said.

There is little demand for light virgin naphtha (LVN) sold outside of the open market window, the first trader said.