Market Intelligence: Asia naphtha prices keep rising as plastics demand declines

02 May 2014 10:06 Source:ICIS Chemical Business

PX, PTA, polyester and polymer markets in China are in the doldrums whilst huge amounts of new capacity are scheduled to come onstream. But tight supply is supporting naphtha

There are worrying signs for naphtha in Asia notwithstanding a run-up in prices.

While regional naphtha may have been bullish, largely because of a supply drawdown, there are concerns about the health of petrochemical demand especially as the margin to make paraxylene (PX) in China deteriorates.

Plastics demand may not keep pace with the upstream price hikes.

Open-spec prices have rallied in response to tightened western deep-sea inflows bound for the east of Suez, along with a cutback in exports from India, a regular supplier. There has been less cargo availability within Asia because of an active refinery maintenance season this spring. Upstream wise, there are many reasons to bolster naphtha and the bull run in prices has suggested that the market has been incredibly strong.

“However, [the] naphtha [price rally] seems to be too fast for [the] downstream. Demand from downstream [petrochemicals] will be capped,” said a trader. Asia’s open spec naphtha prices rose by nearly 5% from early April levels to $970- 972/tonne CFR (cost and freight) Japan on 25 April, ICIS data showed.

Naphtha petrochemical feedstock imports into China – the world’s second-largest economy – slumped 35% in March from year-ago levels to 142,367 tonnes, according to official Chinese customs data. The main reason for the fall was much lower local paraxylene (PX) demand.

Downstream, China recorded an annualised drop of 9% in paraxylene (PX) imports of 756,525 tonnes in March while its purified terephthalic acid (PTA) imports tumbled by 48% from a year earlier to 100,401 tonnes. PTA, made from PX, is the principal feedstock for polyester (bottles and cloth).

China’s high-density polyethylene (HDPE) imports fell by an annualised 14% to 343,944 tonnes in March. The country imported 18,092 tonnes of butadiene in March, down by 36% year on year, the data indicated.

Reflecting a market in the doldrums, PX prices fell by $10/tonne in the week ended 25 April to $1,203-1,208/tonne CFR China Main Port, compared with $1,204-1,245/tonne four weeks ago, based on ICIS. “PX demand is poor,” said another trader.

In fact, it has been quite a sluggish year for PX makers in China, leading to a build up in downstream PTA inventories estimated to be 1.7m-1.9m tonnes.

PX makers face weaker margins, with the naphtha-PX margin at $230-240/tonne and a breakeven point at $300-350/tonne. The naphtha-PX margin previously was $270-280/tonne. The buying interest for feedstock PX is still low given huge supply of around 1m tonnes in China.

Chinese oil majors Sinopec and PetroChina are bleeding by making PX and running their PX units on average at 70-80%. Sinopec, for instance, needs at least $350/tonne to break even.

The situation is likely to worsen with a staggering 4.1m tonnes/year of new PX capacity due for start up in June-July this year.

China holds bloated PTA stockpiles because of grim polyester sales in the first quarter.

The outlook for Chinese plastics demand continues to be dim, as many market participants have said.

HSBC’s flash manufacturing purchasing managers’ index (PMI) for China stood at 48.3 in April, according to the investment bank. A PMI reading above 50 indicates an expansion, while a reading below 50 denotes a contraction in manufacturing activities.

Petrochemical exports from neighbouring South Korea fell 5.0% year on year in March, weighed down also by lower prices, with PX and benzene posting steep declines in volumes. China is a major export market for South Korean petrochemicals.

South Korea’s PX exports fell by 21.8% year on year to 287,647 tonnes in March, while shipments of benzene declined by 35.5% to 149,697 tonnes, according to the Korea International Trade Association (KITA).

South Korea’s overseas shipments of polyethylene (PE) were down by 5.24% year on year at 115,792 tonnes, while exports of polypropylene (PP) slipped by 0.83% to 91,414 tonnes, the data showed.

Overall, in Asia, it remains to be seen whether naphtha prices can sustain their strength amid deteriorating downstream demand. For now, there are many supportive factors to keep naphtha buoyant, chiefly from depleting supply as Asia is net short. Receding cargo availabilities could easily push prices higher.

Moreover, with the gasoline-naphtha spread topping $100/tonne in Europe, the refineries there are pumping out increasing quantities of motor fuel largely to meet the summer driving season in the US, which kicks off in late May.

For that reason, refineries will sap away naphtha into the gasoline blending pool, leaving a lower volume of naphtha exports for Asia.

Meanwhile, some 1.1m tonnes of arbitrage naphtha supply will arrive in Asia in May as inflows tighten, traders said. The volumes are somewhat near the 1m tonnes of deep-sea naphtha inflows which Asia receives for April, they added.

The respective monthly volumes in April and May plunged from the deep-sea imports in March of 1.6m-1.7m tonnes, the traders said.

The deep-sea flows usually hail from northwest Europe, the Mediterranean, Russia and the US.

The US is expected to step up gasoline imports ahead of the peak driving season. US finished motor gasoline inventories fell for the week ended 18 April despite higher production, the US Energy Information Administration (EIA) said on 23 April. US gasoline inventories dropped by 300,000 bbl to 210m bbl for that week.

US refinery utilisation rates were at 91.0%, up from 88.8% the week prior as refineries came out of their planned maintenance.

In Asia, the supply of light naphtha is tightening owing to a heavy slate of refinery maintenance, pushing up premiums in spot naphtha transactions. A couple of key plant turnarounds in India also reduced the country’s naphtha exports.

“Some traders are marking up premiums because of those reasons,” said a buyer.

They may be short-lived as there are worrying signs of weakening ethylene-naphtha margins, signalling the reality of softer plastics demand.

Ethylene margins using naphtha feed in northeast Asia continued their slide during the week ended 25 April, falling a further $42/tonne to $102/tonne despite ethylene prices rising by $13/tonne on unexpected cracker shutdowns and naphtha prices rising by $14/tonne, according to ICIS.

Cracker operators in Asia typically use naphtha as feedstock, with some using liquefied petroleum gas (LPG) for up to a fifth of their output when the price is right. At this juncture, however, LPG is deemed costly for crackers.

By Felicia Loo Samuel Wong