Asia benzene-naphtha spread near 8-month high as US arbitrage opportunities emerge

Even as demand for benzene in the key petrochemical region of Northeast Asia tapered, the Asian benzene-naphtha physical spread - the difference between FOB Korea benzene against CFR Japan naphtha physical - continued to climb, touching nearly an eight-month high, as successive opportunities for traders to ship benzene to the US emerged.

Difference between the two physical markers stretched to as wide as $286.55/mt on May 11, up $48.72/mt day on day. The last time it crossed this level was at $307.17/mt seen on Sept. 16, 2021, S&P Global Commodity Insights historical data showed.

Northeast Asia's demand was lackluster mostly due to lockdowns and slower demand in China, but growing arbitrage opportunities to the US, the alternative safe haven for benzene outlet, lifted prices in Asia and reduced some producers' dependencies on demand within the region.

Moreover, key benzene-exporter South Korea made a comeback when shipments resurfaced every month in the first quarter, thanks to bullish prices in the US. Exports along this route was thin in the fourth quarter last year, with zero shipments in November.

Around 144,069 mt of benzene made its way from South Korea to the US in the first quarter, the latest customs data released on May 11 showed. In April, exports were at 77,590 mt, the largest volume of shipment since May last year.

Lower run rates among Northeast Asia producers further supported the spread, even though oil feedstock naphtha price was firm.

BZN spread in focus

The widening spread snagged some market watchers' attention, as more derivative offers were heard in the less commonly traded benzene-naphtha (BZN) paper spread in Asia market.

Two trade sessions ago, the June BZN paper was heard offered at $275/mt. A day later, June BZN paper rested at $277/mt as benzene physical market surged ahead of derivatives prices.

At the time of writing, a handful of sources notionally valued the June BZN paper spread at $300/mt.

Some sources said the benzene-naphtha physical spread had baulked initial expectations, which drew more BZN derivative offers to tame the price uptick.

Pressure on downstream

The landscape of rising benzene prices in Asia was met with caution though, as downstream producers of benzene derivatives were particularly pressured by negative margins.

For styrene monomer, the production margin for non-integrated SM makers has been calculated mostly in negative, low-mid $100s/mt, occasionally deeper, since early-February.

The phenol market in Asia, once holding strong at the fort, has witnessed prices paring and moving closer to the breakeven margin. CFR China phenol weekly physical price was at $1425/mt on May 10, compared to FOB Korea benzene marker that rested at $1204.17/mt the next day, nearing a $200/mt difference.

As for other smaller downstream products of benzene such as caprolactam, prices were almost unheard of as most producers were struggling with losses. Caprolactam producers in Northeast Asia were heard listing prices for supplies at around $2150-$2175/mt. With price difference below $1100/mt against benzene, breaking even appeared a daunting task.

Collectively, looking ahead, the feedstock cost pressure could pass down along the chain, but whether downstream cargoes could be reshuffled across regions remains a question.