Commodities 2021: Asia to draw more naphtha arbitrage cargoes on increased steam cracker …

Asia to demand more naphtha as steam cracker feedstock

Naphtha buyers seek US cargoes to cover regional deficits

Singapore —
Asian naphtha is set to begin 2021 on a bullish note, with the market firm on demand recovery from the successful restart of South Korean Lotte Chemical’s Daesan steam cracker. Looking forward, fresh steam cracker capacity is expected to come online in the north Asian petrochemicals hub, which would further increase overall Asian naphtha demand.

“We forecast demand will be strong for 2021 because [South Korea’s] YNCC and LG Chem will restart [from turnarounds] in January. The total increase in naphtha demand should be at least four-six cargoes per month (100,000-150,000 mt/month), but we hope that the deficit will not be as much as expected as US deepsea cargoes will start to move into Asia,” said a South Korea-based naphtha end-user.

“All users want US cargoes as they are above 75% paraffin and are good for end-users, and ethylene margins will be maintained until end 2020 or into H1 January 2021 as no one knows if YNCC or LG Chem will start successfully,” the source added.

Offline naphtha-fed steam crackers slated to return to production in January 2021 include YNCC’s No. 2 cracker, LG Chem’s Yeosu cracker, and ENEOS’ Kawasaki cracker, sources said.

Lotte Chem’s Daesan steam cracker restarted on Dec. 7 and reached maximum run rate Dec. 12-13, S&P Global Platts earlier reported. This is a major demand source for naphtha feedstock as the unit has a capacity of 1.1 million mt/year of ethylene and 550,000 mt/year of propylene.

“Asia’s naphtha demand is projected to improve in 2021, primarily from both greenfield and brownfield cracker expansions. The source of the additional import volumes remain speculative, typically higher refinery runs in Middle East would provide the required volumes and US-based C5 are also an option,” said Eshwar Yennigalla, senior analyst at S&P Global Platts Analytics.

Seeking US cargoes

Asia’s naphtha market is typically net short of about 2 million mt/month, which is met by inflows from the West of Suez. Some fresh production capacity is expected from the Middle East. However, sources said most of the incremental demand is expected to be met by US shipments.

“The Asian naphtha deficit is getting bigger, so the marginal volume should be fulfilled by US volumes,” said another naphtha end-user.

US naphtha exports into Asia looks set to kick off to a strong start for 2021, as December-loading fixtures pointed to Asia totaled 174,000 mt while early-January 2021 loading cargoes already amounted to 196,000 mt, with more expected as chartering for January-loadings was ongoing, according to market sources and data from cFlow, Platts trade-flow software.

Firm naphtha prices

The higher demand coupled with reduced runs at north Asian refineries will prompt greater import demand for high paraffin naphtha, which will support prices, sources said.

“Refineries in S Korea and Japan are definitely in low operating rates, so most end-users want to buy high paraffin naphtha, but ADNOC and Aramco both use their trading arms to sell volumes directly to end-users, so traders don’t have any cargoes in hand [decreasing the offers in the market] — this will support the naphtha market,” the source added.

Furthermore, increasing success in tackling the coronavirus pandemic would lead to a recovery in gasoline and middle distillate demand. This would tighten naphtha supply, as a recovery in condensate splitter margins would boost prices for heavier naphtha grades, and refineries are expected to increase jet fuel yields at the expense of naphtha yield, sources said.

Apart from firmer demand for paraffinic naphtha grades for steam cracking, demand for heavy full-range naphtha as feed for condensate splitters is also set to increase, sources said.

“Usually the steam crackers are not buying minimum 65% paraffin content naphtha, only the South Korean splitters and Japanese steam crackers [are], and it is the splitters not buying that was the problem for demand,” said a naphtha producer.

Market sources noted that since it would take time for refineries to ramp up run rates, a recovery in spot demand for heavy-full range naphtha would support higher prices.

“India has increased refinery run rates, but Korea has not, and because the jet crack is up, Korean buyers are increasing import volumes and will be getting more heavy-full range naphtha from the spot market [as their system cannot supply more yet],” said a third naphtha end-user.

Positive olefins margins also had steam crackers demanding high paraffin content naphtha. End-users were heard buying cracker-feed naphtha with paraffin content of more than 70% — something they could afford too. The steam cracker outages tightened ethylene supply and supported the ethylene-naphtha spread above the typical $350/mt breakeven point for non-integrated producers since Sept. 3, Platts data showed.

“Initially we thought cracker margins would be down in H2 2021 because of so many new crackers, but for 2020 the market had also thought the same, but it did not happen as olefins margins were quite good. So, it is difficult to say if margins will be down due to the new crackers. Think demand will keep strong, and supply side will be short as so many crackers have to use light naphtha not from system but from the spot market,” said the third naphtha end-user.

Upcoming steam cracker production in Asia:

Data from: Market sources