Asian ethylene-naphtha spread reaches 9-month high on improving naphtha supply

The key spread between Asian ethylene and naphtha, closely monitored by petrochemical producers, reached a nine-month high as naphtha prices tumbled on rising supply.

The CFR Northeast Asia ethylene-CFR Japan naphtha physical spread was assessed at $289.50/mt at the Asian close Feb. 5, widening $116.50/mt, or 67.34%, on the week to stay above the typical breakeven spread of $250/mt for integrated producers, but still below $300-$350/mt for non-integrated producers.

The spread was last higher at $306.5/mt on May 5, 2023, S&P Global Commodity Insights data showed.

The week-on-week jump in the spread was driven by a sluggish Asian naphtha complex, as expectations of supply improvement in the second-half of March weighed on naphtha values.

Naphtha shipments transiting the longer Cape of Good Hope route are estimated to reach Asia end-March, while Middle Eastern refineries are expected to return from turnarounds during the month, sources said.

Demand for naphtha also waned, as North Asian end-users switched a larger percentage of their feedstock with co-distillate propane, according to sources.

South Korea's LG Chem plans to begin feeding the maximum percentage of LPG at all three of its steam crackers from second-half February -- 15% at its Daesan unit and Yeosu No. 1, and 25% at Yeosu No. 2, a company source said.

The No. 1 unit at Yeosu can produce 1.18 million mt/year of ethylene and 550,000 mt/year of propylene, while the No. 2 can produce 800,000 mt/year of ethylene and 400,000 mt/year of propylene. The unit at Daesan can produce 1.27 million mt/year of ethylene and 450,000 mt/year of propylene.

Fellow South Korean Lotte Chemical was, likewise, planning to maximize LPG usage, a source with direct knowledge of the matter said.

Lotte Chemical was not immediately available for a comment when reached out by S&P Global.

Mirroring the softer naphtha market fundamentals and tracking lower crude prices, the physical C+F Japan naphtha marker narrowed $3/mt on the day to $650.50/mt at the Feb. 5 Asian close. This was down $86.50/mt from a week ago, when the physical benchmark peaked at $737/mt on Jan. 29 following a barrage of supply disruptions.

Despite the rise in ethylene margins, downstream petrochemical demand was still poor, preventing end-users from raising steam cracker run rates.

Ethylene strengthens on tight supply

The Asian ethylene market improved, driven by tight supplies amid lower steam cracker operations. In addition, delays of deepsea cargo arrivals from the US amid logistics constrains accelerated supply tightness in the region.

Asian ethylene climbed to $940/mt CFR Northeast Asia Feb. 1, the highest level since March 30, 2023, when the price was assessed at $950/mt, according to S&P Global data. The ethylene assessment remained stable at that level Feb. 5.

Sources expect spot demand to remain firm for March delivery business, as the ongoing reduction in run rates by steam crackers would likely deepen amid steam cracker turnaround season. However, at the same time, end-users were reluctant to accept higher than $950/mt CFR Northeast Asia, citing negative margins for downstream production, notably polyethylene.

Asian polyethylene was assessed at $950/mt CFR Far East Asia on Feb. 5, with the price spread between PE and ethylene calculated at $10/mt, far below the typical breakeven spread of $150/mt.

Around 60% of ethylene produced in Asia is used for polyethylene production.

Asia's PE margin from naphtha also remained negative. The spread between PE and naphtha was calculated at $299.50/mt Feb. 5, below the breakeven level of around $500-$600/mt.