Propane and naphtha in battle for European petrochemical demand

A behind-the-scenes battle is raging in the European petrochemical industry, as refined oil product naphtha and natural gas liquid (NGL) propane compete to be the feedstock of choice for crackers.

The feedstock petrochemical producers opt to crack comes down to profitability. But recent volatility in the propane-naphtha spread is causing uncertainty about how much demand propane and naphtha will see from the petrochemical cracking industry in 2018.

“Propane is extremely volatile due to a change in the market. People were confident it would be strong in the winter, and production was much higher in the US than expected. So it came down, and there’s volatility until it stabilises,” one trader explained. “On the other hand naphtha volatility is only in one direction – and that’s downwards.”

NUMBERS GAME

The propane-naphtha spread shows how much cheaper or more expensive propane is compared to its cracking competitor, naphtha.

Propane and naphtha can be cracked by petrochemical companies to produce ethylene, although petrochemical producers tend to lean towards naphtha because of the other products produced as a result of the cracking.

Cracking naphtha produces ethylene, propylene, butadiene (BD), benzene, toluene and xylenes, while cracking propane produces ethylene and propylene.

However, when the propane-naphtha spread dips below -$60/tonne, market sources say it can make more financial sense to crack propane over naphtha, depending on how easy it is for each plant to switch between the two feedstocks.

The market is no stranger sub-$60/tonne conditions, as seen at the beginning of 2018 when propane reached lows of -$125/tonne.

“At these levels, pretty much everyone in the world in petrochemicals switches to maximum liquefied petroleum gas (LPG), which takes out naphtha demand for sure,” said one trader at the time, highlighting the push and pull relationship between the two feedstocks, and the speed at which one can take over the other to steal away demand.

Of Europe’s 25m tonnes of cracking capacity, LPG flexibility is between 10% and 30% overall. In the past couple of years, cracker operations have shifted towards the higher end of that range. LPG is typically composed of propane and butane.

TURBULENT FEW MONTHS

Considerable volatility in this relationship has been evident for several months. In 2017, the propane-naphtha spread rose from -$64/tonne at the end of June to +$24/tonne at the start of October, pushed up by a number of factors including rising propane prices in the US, summer turnarounds and an unplanned outage at Shell’s Pernis refinery.

The spread tumbled to -$125/tonne by February 2018, due to falling propane demand, caused by high prices.

In highly liquid markets such as propane and naphtha, the spread between the two prices constantly fluctuates, with noticeable week-on-week differences. However, the swing between negative and positive spreads in the past seven months came as a surprise to market players, who attributed the flips to oscillating propane demand.

When the spread started to narrow in July last year, most petrochemical producers were hesitant to switch from cracking propane to naphtha, because of the cost associated with switching.

Towards the end of August the propane market started to tighten more, with very few cargoes available heading into September.

On 15 September 2017 the propane-naphtha spread was at zero, crossing into positive figures on 22 September, the first time the spread has inverted since 15 November 2013.

NAPHTHA BRIEFLY TAKES THE LEAD

The now positive spread prompted participants to start the switch from propane cracking over to naphtha, with petrochemical demand for propane starting to slip as a result.

Some petrochemical producers were, however, still sticking to propane cracking, with higher ethylene prices at the time providing strong enough margins to absorb the extra cost of feedstock.

The positive spread continued for most of October, with naphtha players seeing more demand from the petrochemical industry while propane market sources described buying interest as “non-existent”.

The high propane prices soon drove demand so low that values slumped, with the spread falling to -$24/tonne in mid-November.

However, petrochemical demand for propane remained very limited for the rest of 2017 and into January 2018, with demand only starting to pick up following a nosedive in the spread to -$109/tonne in February 2018.

During the winter, propane demand is usually strong from the heating industry, which typically drives prices. However, when this buying interest 
is limited in the second and third quarters, petrochemical producers tend to take advantage of the lower values and petrochemical demand tends to be at its highest.

This could narrow the spread again, making propane less attractive and naphtha more as a result.

As well as seasonal influences, the balance for naphtha and propane demand could be influenced by the projected boom in US shale gas production.

A reference case put forward by the US Energy 
Information Administration earlier in February showed the country’s NGL production nearly 
doubling between 2017 and 2050, supported by a jump in petrochemical industry demand worldwide.

An increase in shale gas production in the US will lead to an increase in its propane output, and market sources believe the surplus LPG will head to Europe.

“Europe might be the only natural outlet for those barrels – that weakens the propane-naphtha spread and incentivises more people to crack that,” said 
one trader. “But the seasonal switch is also about 
to happen.”