Europe petrochemical producers to hike naphtha use in crackers

LONDON (ICIS)–European petrochemical producers are set to increase use of feedstock naphtha in steam cracking, particularly in coastal areas, because of higher cracker margins, good availability and a bullish outlook on co-products.

If producers were to ramp up naphtha usage, it could potentially increase butadiene and aromatics supply in Europe to an extent, as naphtha yields a larger volume of these products.

Amid the on-going decline in LPG (liquefied petroleum gas) margins, several sources said that European crackers would be reaching a switching point from LPG to naphtha.

Some have already made the switch, a feedstocks trader said.

Steam crackers produce ethylene, propylene, and co-products butadiene and aromatics-rich pygas. Close to 80% of steam cracking capacity in Europe is configured to employ the typically costlier naphtha feedstock. The remainder of the continent’s capacity has more flexibility over feedstock use.

Producers have been maximising propane use for the remainder capacity, especially in coastal areas, as contract naphtha-based margins in 2016 were on average at €542/tonne, while contract cracker margins based on LPG for 2016 stood at an average of €601/tonne. The cost of transporting propane to inland markets destroys some of its value relative to naphtha.

In the new year, contract naphtha margins have outperformed LPG cracker margins (see chart).

Source: ICIS cracker margin report

Market sources are expecting naphtha-based contract cracker margins to increase further on a bullish co-products market. Naphtha yields a larger amount of co-products butadiene and aromatics-rich pygas.

European aromatics prices have surged higher this week, largely driven by sharp increases in the benzene spot market as January draws to a close. January and February benzene prices have breached the $1,000/tonne CIF ARA level for the first time since November 2014.

Tight regional supply as well as continued upward momentum in the US Gulf has supported the bullishness in the benzene market ahead of February. This has also supported some higher numbers for toluene and mixed xylenes (MX), with more export demand emerging due to higher global pricing.

With the naphtha/benzene spread approaching $600/tonne as January draws to a close, many aromatics players are questioning whether the current prices levels seen for benzene are sustainable. With healthy HDA (hydrodealkylation) production economics into March due to the widening toluene/benzene spread as well as the various global styrene turnarounds from February onwards, some sources are expecting a sharp downward correction on benzene before the end of the first quarter.

Benzene-naphtha price spread is approaching $600/tonne

Meanwhile, pricing is also bullish for co-product butadiene, with the February contract price settling up 49% at €1,400/tonne. The hefty increase for butadiene will be key to cracker operators’ choice of feedstock.

Given better-than-expected Q4 demand following a string of hiccups and outages throughout 2016, the European butadiene supply/demand balance was already fairly tight heading into the new year. Asian demand has rocketed, as have spot prices, meaning that the pull on European volumes have been huge. European export prices reached five-year highs this month, quadrupling year on year.

At the same time, domestic butadiene consumers well aware of potential supply tightness have exercised their rights to maximise contract volumes, leaving butadiene producers ostensibly short on spot volumes with which to play the arbitrage game. However spot deals have been found and sources link this largely to the reduction in light feedstock – LPG – cracking, although there is the suggestion that smaller butadiene consumers might have been seeing some cuts in volume.

Apart from margins, availability is an overriding factor in feedstock choice. Prompt LPG supply is tight, particularly that of propane due to advantageous arbitrage opportunities for US volumes in Asia which is displacing some volumes normally destined for Europe.  The market is more balanced going into the second half of February.

On the other hand, naphtha availability is healthy, partly on a reduction in US gasoline blending demand.

Focus article by Cuckoo James, Nel Weddle and Truong Mellor

(pictured above: BASF’s cracker in Ludwigshafen, Germany. Source: BASF)