INSIGHT: A slippery slope for Asia naphtha

Author: Melanie Wee

2019/08/19

SINGAPORE (ICIS)--Asia naphtha markets have struggled through some challenging times and continue to embrace the unexpected.

Spot forward open-specification naphtha CFR (cost and freight) Japan prices for second-half September delivery slumped to around $450.00/tonne in early August, marking the third time in 2019 levels have tumbled to this low. Naphtha prices averaged $455.00/tonne CFR Japan in early-June.

Volatile crude prices have impacted naphtha with demand for September delivery cargoes from downstream end-users in northeast Asia slowed to a trickle.

Cracker turnarounds and lowered output in parts of northeast Asia in August-September crimped demand for the feedstock.

Taiwan’s Formosa Petrochemical (FPCC), a key importer in Asia skipped its first-half September naphtha requirements. This coincided with maintenance at its cracker located in Mailiao scheduled throughout September.

FPCC was also in the market to export a medium sized cargo of heavy naphtha for September loading.The firm’s rare switch to sell naphtha coincides with comparatively better economics for the heavy grade rather than paraffinic naphtha used for olefins production, demand of which has lacked momentum.

South Korea’s LG Chem plans to run its cracker located in Daesan at reduced rates of about 90% of capacity for at least a month and that may well curtail its demand for naphtha.

Elsewhere, JG Summit in the Philippines will carry out maintenance for expansion work at its cracker in Batangas from early-October to early-December.

Naphtha cargoes in Asia have also fetched lower differentials at discounts to spot Japan quotes, compared with premiums commanded before, reflecting the undertones of the bearish market.

Malaysia-based Lotte Chemical Titan has purchased second-half September delivery spot naphtha at a low single-digit discount to spot CFR (cost and freight) Japan quotes for delivery to Pasir Gudang.

This is lower than premiums to spot CFR Japan quotes the firm agreed earlier for first-half June delivery supplies.

The bearish market has been exacerbated by lingering uncertainty stemming from the trade conflict between the US and China, which has put downward pressure on several downstream petrochemicals and commodities.

China’s official manufacturing purchasing managers’ index (PMI) rose to 49.7 in July from 49.4 in June. While the readings were higher, the latest PMI for July remained below 50, according to latest data from the National Bureau of Statistics.

The PMI is a barometer of an economy’s manufacturing activity, in which a reading above 50 means expansion and under 50, a contraction.

China’s imports of naphtha stood at 255,951 tonnes in June, well below the country’s intake during the same month in 2018 of 718,507 tonnes, according to ICIS Supply and Demand data.

Asia naphtha’s physical crack spread against ICE Brent crude oil futures – a measure of the product’s refining margin – fell into negative territory in June. And it is the lowest in more than a decade as a result of cracker shutdowns, which has dented naphtha demand.

Moreover, the (untimely) availability of liquefied petroleum gas (LPG) cracker feedstock has reduced Asia demand for naphtha.

Naphtha’s forward market structure or intermonth time-spread has hovered at a narrower backwardation, where prompt-month prices are just a shade higher than forward months, exposing signs of the fragile market climate.

And it may not come as a surprise should the market flip into a contango in the coming days. It is already bordering close to parity against a backdrop of waning demand and bloated supply.

That said, the road ahead looks promising once the tide turns.

Within Asia Pacific, cracker expansions are poised to encourage naphtha demand for petrochemicals production.

South Korea’s Hanwha Total Petrochemical started trial runs around mid-August at its cracker located in Daesan with additional ethylene and propylene capacities of 310,000 tonnnes/year and 120,000 tonnes/year respectively.

Also set to potentially spur demand of the petrochemical feedstock is Malaysia’s state-owned Petronas’ 1.2m tonnes/year cracker located in Pengerang in the state of Johor. The cracker is part of its Refinery and Petrochemical Integrated Development (RAPID) project venture with Saudi Aramco.

A slowdown in western arbitrage cargo arrivals could help to alleviate some of the bearishness caused by limited Asia demand.

Around 900,000 tonnes of western origin naphtha is estimated to reach Asia for August, down from monthly volumes averaging at around 1.2m tonnes in July and June.

Besides, it never always gets worse.

By Melanie Wee

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