South Korea's steam crackers eye run rate cuts in Mar on weak petrochemical demand

Steam cracker operators in South Korea are either planning to lower operating rates at their plants by 5%-10% in March or are exploring the viability, in an effort to cut back olefins production and rein in an oversupply of ethylene and butadiene, as the coronavirus or COVID-19 outbreak has hammered downstream petrochemical demand, market sources said this week.

Most South Korean steam crackers had ramped up operations to full capacity in February, after run cuts of 10%-20% were implemented in January due to weak olefins production margins, sources said.

South Korea's LG Chem plans to trim run rates to 95% from full capacity at both its Daesan and Yeosu naphtha-fed steam crackers from March 1 for a month, a company source said. The crackers have ethylene production capacities of 1.27 million mt/year and 1.18 million mt/year, respectively.

Yeochun Naphtha Cracking Center plans to cut operations at its No. 2 steam cracker with an ethylene capacity of 580,000 mt/year by 5%-10% in March, from full capacity, a company source said.

Meanwhile, Korea Petrochemical Industry Co. is considering deepening its steam cracker run rate cut to 20% in March from the current 10%, while Hanwha Total and Lotte Chemical are also considering run rate cuts at their units, market sources said.

In Japan, steam cracker operators had cut run rates in January, maintained the reduced rates in February, and are expected to continue running at the same reduced levels in March, naphtha traders said.

Ethylene production margins had slumped into negative terrain on waning demand in the downstream plastics sector since the COVID-19 outbreak, even as the price of naphtha feedstock stays low, sources said.

The CFR Northeast Asia ethylene spread against CFR Japan naphtha was at $261.25/mt Thursday, below the typical breakeven spread of $300-$350/mt, according to S&P Global Platts data.

CFR Northeast Asia ethylene was assessed at $700/mt at the Asian close Thursday. It was last lower on October 30, 2019 at $680/mt, according to Platts data.

POOR PETROCHEMICAL DEMAND

Ethylene demand from China had been weakening since the Lunar New Year holidays end-January. The sluggish demand situation dragged on with an extended holiday and disruptions to land transportation following the COVID-19 outbreak in China, sources said.

Downstream PVC plants in China are facing high inventory problems due to road blocks, delaying deliveries to customers, a Chinese PVC producer said. For some PVC makers in east China, the inventory level is about 10-20 times higher than usual, the source added. This has led some makers to shut plants or reduce operations to around 50% of capacity.

Looking at other ethylene downstream products, styrene makers have cut operations to around 60%-80% of capacity, and monoethylene glycol producers are running their plants at around 70%-90% of capacity.

Land logistics were disrupted in China after the virus outbreak, which slashed downstream plastics or synthetic rubber demand. The high inventory has forced plastic makers to store plastic resins outside warehouses in an unprecedented move, and stock levels have hit 1.5 million mt, according to several market sources.

For butadiene, supply is also heavy as operations at downstream synthetic rubber plants have been cut to around 60% of capacity, sources said.

Synthetic rubber inventory has hit a five-year high in China, according to market sources. State-owned Sinopec was reported to be considering exporting butadiene to reduce its inventory pressure.

The CFR China butadiene price benchmark was assessed at $740/mt Thursday, the lowest level since December 11, 2015, when it stood at $705/mt, Platts data showed.

Despite bearish olefins demand and worsening petrochemical margins, steam cracker run cuts would likely remain small for now due to healthy margins for propylene, petrochemical sources said.

NAPHTHA DEMAND HIT

The planned cuts and consideration of lower operating rates at steam crackers have weighed on feedstock naphtha, with the CFR Japan naphtha crack spread to ICE Brent front-month crude oil futures falling to a five-month low of $42.225/mt at Thursday's Asian close, Platts data showed. The crack was last lower on September 26 at $36.45/mt.

"A decrease of 5% from both LG Chem's naphtha crackers might have a slight effect as it means a little more than one naphtha cargo demand loss," a North Asian end-user said.

Some end-users have bought less naphtha feedstock in preparation for impending run cut decisions, traders said.

The CFR Korea naphtha cash differential was assessed at plus $11.50/mt on Thursday, against the benchmark Mean of Platts Japan naphtha assessment, falling from an average of $23.35/mt over February 3-14, Platts data showed.

"The naphtha situation is based on steam cracker run rates in Asia. I don't think the market would be bullish in the near future, and we need clearer market direction from China for the polyethylene and

ethylene market," the North Asian end-user said.

Reflecting the weak market and falling crude complex, the CFR Japan naphtha price tumbled $15.50/mt on the day to be assessed at a 14-month low of $438.75/mt at the Asian close Thursday. It was last lower on December 26, 2018 at $434.375/mt, Platts data showed.