High costs, lower margins to weigh on Japan's steam cracker operations in April

Japan's naphtha-fed steam crackers are to face increased pressure to lower run rates in April with more crackers returning from maintenance, a change from March when many were able to maintain close to full operations to make up for the shortfall in domestic ethylene production during maintenance season, which is in contrast with the widespread run cuts at other Asian steam crackers due to poor downstream margins.

Around 37% of Japan's steam cracking capacity was shut due to maintenance in March, however, this will drop to around 25% in April as Keiyo Ethylene's cracker was in the process of restarting. The return of Keiyo Ethylene's cracker production would pressure Japanese cracker margins and spark lower operation rates.

Comparatively, naphtha-fed steam crackers in South Korea and China had cut run rates to an estimated 85%-90% in March, with many expected to reduce rates further to 80% in April, amid weak ethylene demand and high naphtha costs.

The average operation rate of Japan's naphtha-fed steam crackers was 97.4% in December 2021, 94.2% in January 2022, and 92.4% in February 2022, latest data from Japan Petrochemical Industry Association showed.

Ethylene tight on lower cracker runs

The expected restart of Japanese crackers in April could alleviate the tightness for spot ethylene, some market sources said.

"We have some enquiries from buyers in Southeast Asia, as there is very limited availability there. However, with crackers in Northeast Asia planning to cut operating rates further in April, it has been difficult to secure cargo," a trader based in Southeast Asia said. "Japanese crackers typically operate at high operating rates of 95%-100%, so the supply situation could ease a little if these crackers restart as planned and run at their normal rates."

As crackers in Japan typically supply contractual ethylene volumes to the domestic markets, some Japanese buyers had to import ethylene from other Asian regions. However, volumes were limited by lowered operating rates at downstream facilities, according to some traders.

"There is no definite answer for what the outlook will be like because the upstream markets are too volatile and downstream demand is weak," a trader based in Northeast Asia said. "But definitely the restarts will help to improve the supply situation in Asia overall."

Thin downstream margins

Non-integrated producers of key downstream products such as polyethylene, monoethylene glycol, and styrene monomer have suffered negative production margins since late February, slashing operating rates in order to reduce ethylene consumption.

Margins for HDPE film were last calculated at negative $300/mt March 28, S&P Global Commodity Insights data showed. Margins for MEG were calculated at negative $265/mt, while margins for SM were at minus $157.425/mt.

Ethylene buyers reduced purchase quantities in March amid the operating rate cuts, with several saying they would only purchase sufficient feedstock to supply contractual volumes as derivative production was unprofitable.

High feedstock cost

Many Asian steam cracker operators shied away from purchasing H2 April delivery naphtha feedstock, as they were faced with a spike in costs, which crunched downstream earnings. Purchasing activity resumed in H1 May but remained muted as many were not keen on the high costs of naphtha and had lowered run rates.

Benchmark C+F Japan naphtha rose above the psychological $1,000/mt level in early March, and averaged $1,012.40/mt over March 1-28. Comparatively, the average in February was $858.16/mt, while the January average was $769.86/mt, S&P Global data showed.

This also attracted steam crackers to use LPG as an alternative feedstock to lower overall costs at various times from January through March. The resultant drop in demand weakened Asian naphtha even as supply shortened drastically from fewer Western inflows and crude-driven flat prices.

LPG is typically an alternative steam cracker feed stock that is economically viable when it is 90% or lesser than the price of naphtha. However, most steam crackers can only switch a small portion of their feedstock to LPG.

Reflecting the weaker naphtha sentiment, key CFR Japan naphtha physical crack against front month ICE Brent crude futures shrank to a nine-month low of $93.45/mt at the March 25 Asian close, down $44.125/mt on the week, S&P Global data showed. The physical crack has since edged back up to $104.75/mt at the Asian close March 28 due to the strength of the European naphtha segment.

"Naphtha market will be bearish in April and May as some crackers will return from turnaround in Japan," a Japan-based naphtha end-user said. "Maybe the cracker margins will be fine in June, because some crackers [had lowered] operation rates for April and May. So supply and demand balance for derivative products will be fine in June [and] the value of naphtha will recover in June and July."

Steam cracker operations in Japan:

Data from: Market sources