South Korea's naphtha-fed steam crackers cut runs to 76% on backlog from strike

South Korea's naphtha-fed steam crackers reduced run rates to an average of 76% capacity after a week-long nationwide strike by truck drivers choked the outflows of polymers such as polyethylene, polypropylene, PVC and created an inventory backlog.

Steam crackers were eyeing a recovery in run rates after the strike ended late June 14, and truck drivers returned to work June 15. However, operations are under pressure from poor downstream margins, and it would take time to ramp up polymer manufacturing facilities, said market sources.

"For now, we are focused on shipping out the cargoes for our customers. Polymer inventory levels are still too high now so we can't increase operating rates immediately," said a South Korean ethylene producer.

"We think it could take at least a week to finish delivering the cargoes, and it is impossible to increase run rates at the moment as we don't have a clear delivery schedule yet," said another South Korean ethylene producer.

Some market sources said run rates were unlikely to see a large increase as they had already been lowered prior to the strike due to falling prices and a squeezed ethylene-naphtha spread.

"The crackers could possibly ramp up to around 80% or 85% after inventory levels are lower, but it is unlikely that they would go higher unless the ethylene market picks up as sentiment is still very bearish at the moment," said a trader.

Operating rates at key downstream polyethylene facilities were estimated at 60%-70% on June 14, compared to 75%-80% the previous week, a South Korean producer said.

Shipments of petrochemical products have plunged by at least 90% since June 7, according to the Korea Petrochemical Industry Association.

Cracker operators therefore had no choice but to reduce operating rates to prevent an inventory buildup. Operation rates at South Korean crackers were originally planned at 84% for June, but dropped to 81% on June 7, and to 76% on June 14, according to market sources.

Poor ethylene market

Sentiment in the ethylene market remained bearish despite cuts in operating rates on weak buying appetite, with several derivative plants on turnaround or operating at lower rates amid lackluster demand and squeezed margins.

Prices of ethylene were last assessed at $1,010/mt CFR Northeast Asia on June 14, stable on the day, S&P Global Commodity Insights showed.

The spread between CFR Northeast Asia ethylene and C+F Japan naphtha was last calculated at $201.875/mt on June 14, down $4/mt on the day, which was below the typical breakeven spread of $300-$350/mt.

Naphtha lacks demand

The Asian naphtha market was weak amid a lack of demand from petrochemical producers, with only one spot buy tender for cracker-feed naphtha heard issued for the H2 July delivery cycle. This tender was by Lotte Titan and was awarded at a discount of $20/mt to the Mean of Platts Japan naphtha assessments, CFR Pasir Gudang, sources said.

Naphtha supply was long, with several tenders heard issued from the Middle East and India in the past week, pressuring the market. Producers offered at least 194,050 mt of naphtha via tenders in the week ended June 10, 283,000 mt in the week ended June 2, and were expected to continue offering volumes this week due to high refinery runs.

Driven by transport fuel demand, high refinery operations meant more naphtha available domestically, reducing the spot requirements of naphtha-fed steam crackers from the international market.

Reflecting the weak naphtha market, the CFR Japan naphtha physical crack against front-month ICE Brent crude futures has been in the negative territory since May 27, and was last assessed at minus $116.40/mt at the June 14 Asian close, down $31.375/mt on the day, S&P Global data showed. This is over a 13-year low, as the physical crack was last lower on Nov. 19, 2008, at minus $119.85/mt.

South Korea naphtha-fed steam cracker operations

Source: Producers, market sources