OUTLOOK ’19: Asia naphtha to draw support from stable petchem demand

Author: Melanie Wee

2018/12/21

SINGAPORE (ICIS)--Asia’s naphtha market is envisaged to draw support from healthy regional demand for petrochemical production, which might outpace supply despite expectations of ample western arbitrage cargo flows.

A ship being loaded at a port in Tokyo. (Photo by Franck Robichon/EPA/REX/Shutterstock)

Spot naphtha prices have been on a rollercoaster, fluctuating heavily in the fourth quarter of the year due to volatility in upstream global crude oil futures markets.

Naphtha prices in Asia have plummeted to historical lows of below $500/tonne CFR (cost and freight) Japan, in part dragged down by substantial falls in crude oil futures combined with a supply overhang situation.

But consistent end-user demand for downstream petrochemical production has helped to soak up regional supply, alleviating some of the bearish sentiment.

The naphtha market was mostly in a contango, where prompt-month prices are weaker than the forward month. A contango market structure underlines weak market fundamentals.

In contrast, the market was at a backwardation this time in the preceding year.

As of 14 December, Asia’s naphtha crack spread to prompt-month February ICE Brent crude futures stood at $53.18/tonne, significantly weaker than levels at $121/tonne during the same period in 2017.

Crude oil markets were pressured down on concerns over China and the global economy. The downward slide was limited by expectations that supply will tighten in 2019, following the agreement between OPEC and its allies to lower production.

On the flip side, most downstream cracking facilities in Asia Pacific continue to run at optimum or full capacity, thanks to steady ethylene demand.

“Demand is still there and we are managing [olefins] margins okay,” said a northeast Asia-based market source.

In northeast Asia, naphtha-based ethylene margins were at $315/tonne as of 7 December, up from $178/tonne a month ago. Margins were, however, well below $612/tonne levels seen a year ago.

LPG-based margins in the northeast Asia region rose to $258/tonne on 7 December from week-earlier levels at $204/tonne, according to ICIS’ weekly margin report.

The market took comfort from expectations of limited availability of cheap alternative feedstock liquefied petroleum gas (LPG), which might help sustain reliance on naphtha in the near term, according to industry sources.

An estimated 1.7m tonnes of western arbitrage naphtha cargoes, possibly more, are expected to reach Asia in December. Volumes are on par with the previous month, but well above monthly volumes averaging at around 1.2-1.3m tonnes.

Steady demand, at the very least, is helping to counter the heavy deep-sea cargo flows from Europe and the Mediterranean.

Meanwhile, commodities trader Trafigura observed a challenging trading environment for the year, according to its 2018 annual report.

“Trading conditions in naphtha were robust throughout the year, with strong petrochemical and gasoline blending margins supporting demand growth,” it stated in the report.

“Looking forward to 2019 … we are closely watching refinery margins and the price relationship between gasoline and other clean products,” it said.

In China, consumption of naphtha was healthy even as the country’s trade war with the US has weighed on its economy.

China imported 516,985 tonnes of naphtha in October, rising by 11% from the same period a year earlier, latest Customs data showed.

According to Chinese private media group Caixin, China posted a General Purchasing Managers’ Index (PMI), which is a measure of manufacturing activity, stood at 50.2 in November, hovering just above the 50 level – the threshold for expansion. Its October PMI reading for China was 50.1.

A PMI reading of 50 or higher indicates an expansion, while a number below that denotes a contraction.

LPG-based margins in the northeast Asia region rose to $258/tonne on 7 December from week-earlier levels at $204/tonne, according to ICIS’ weekly margin report.

The market took comfort from expectations of limited availability of cheap alternative feedstock liquefied petroleum gas (LPG), which might help sustain reliance on naphtha in the near term, according to industry sources.

An estimated 1.7m tonnes of western arbitrage naphtha cargoes, possibly more, are expected to reach Asia in December. Volumes are on par with the previous month, but well above monthly volumes averaging at around 1.2-1.3m tonnes.

Steady demand, at the very least, is helping to counter the heavy deep-sea cargo flows from Europe and the Mediterranean.

Meanwhile, commodities trader Trafigura observed a challenging trading environment for the year, according to its 2018 annual report.

“Trading conditions in naphtha were robust throughout the year, with strong petrochemical and gasoline blending margins supporting demand growth,” it stated in the report.

“Looking forward to 2019 … we are closely watching refinery margins and the price relationship between gasoline and other clean products,” it said.

In China, consumption of naphtha was healthy even as the country’s trade war with the US has weighed on its economy.

China imported 516,985 tonnes of naphtha in October, rising by 11% from the same period a year earlier, latest Customs data showed.

According to Chinese private media group Caixin, China posted a General Purchasing Managers’ Index (PMI), which is a measure of manufacturing activity, stood at 50.2 in November, hovering just above the 50 level – the threshold for expansion. Its October PMI reading for China was 50.1.

A PMI reading of 50 or higher indicates an expansion, while a number below that denotes a contraction.

Outlook article by Melanie Wee

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