OUTLOOK ’14: Europe naphtha market braces for fundamental changes

By Cuckoo James

LONDON (ICIS)–The European naphtha market is bracing itself for fundamental changes in 2014 as it is forced to loosen its tight grip over the US export market.

The US, traditionally a naphtha importer, is now settling comfortably into its new role as a naphtha exporter.

In addition, the increasing profile among traders of the alternative cracker feedstock liquefied petroleum gas (LPG) will most likely cut into the European naphtha sector’s petrochemical market share.

“The LPG desk grew extensively during the year under review. It traded more volume, shipped more tonnage and operated in more countries,” Swiss-trading firm Trafigura said.

LPG is increasingly becoming a “frontline commodity” as gas producers maximise its production by targeting wet gas reserves, it added.

But not all crackers in Europe have the capacity to crack LPG, and this could act as a deterrent in switching between feedstocks.

A naphtha broker said: “[Generally] They don’t have that option, they can only switch 25%. The older ones are set up to use just naphtha, the newer ones you get more flexibility, I think they can even switch fully.”

A major European petrochemical producer said: “We expect a similar year [to 2013] but with more LPG in the front, but we also could see a lot of naphtha coming from the US. We have now offers of natural gasoline from the US, but that is naphtha. That is the big thing in 2014.”

Trafigura says it is focused on building the Texas Dock and Rail (TDR) oil products storage and export complex at Corpus Christi, Texas, in the US which would act as a principal export outlet of oil products from the Eagle Ford shale formation.

A decline in demand for naphtha from the petrochemical sector in the US – as cheap ethane has replaced the feedstock at many US crackers – is also paving the way for more US naphtha exports.

“At least for now, the trend looks to continue,” Trafigura said.

Meanwhile, the rise of “super-refineries” in Saudi Arabia and Asia could displace some of the European naphtha market share in Asia, its other key export market.

Europe currently exports an average of 700,000-800,000 tonnes of naphtha to the Asia-Pacific region.

“Traditionally, Japan, Korea and Taiwan have been the main centres for petrochemical industry demand for naphtha. That began to change this year,” Trafigura said.

Here too, the increased competition has been compounded by the rise in US naphtha exports.

“The US has traditionally imported naphtha for gasoline production and blending purposes. As shale gas production has increased the US is now a naphtha exporter,” Trafigura said.

Trafigura said in its annual report that it is wary of the increasing impact of US biofuel legislation on refined products markets.

A rise in the value of mandatory blending component Renewable Identification Numbers (RINs) in the US was the cause of much of the slowdown in mid-year demand for European gasoline and naphtha, with US buyers having to cut back on gasoline imports, and as a result naphtha imports.

Europe is structurally long on naphtha, and sellers need to export to the US gasoline and Asian petrochemical sectors to keep stocks in balance.

However, not everyone is convinced any extra naphtha from the US would be absorbed by the European market.

The petrochemical producer said: “I think there will be more naphtha supply, the crackers need relatively less [material], as there are more crackers down. The capacity to consume naphtha is lower [in Europe].”

The naphtha broker said: “The problem is we already have a lot of stuff coming from Russia. I just wonder if we can take anymore. Tonnes and tonnes everywhere and nobody taking it, it’s been a bit like that all year.”