Asia offers some demand support for LPG, naphtha amid dismal Mediterranean trade

Healthy volumes of LPG and naphtha from Algeria are heading East on expectations of better arbitrage margins as trading activity in the Mediterranean is limited during the summer, offering Asian consumers more diverse supply sources for petrochemical feedstock ahead of the winter, according to trade sources and industry data.

The Mediterranean continued to see abundant cargoes and minimal trading as LPG use for heating eases during summer months.

Trade sources said that exporters hope the Eastern market would help absorb some surplus from the Mediterranean during the seasonal lull, even as Asia continued to attract ample LPG supply from the Middle East, US and occasionally West Africa.

This comes ahead of the winter stocking-up period in North Asia around the end of the third quarter. The Asian LPG market, which was in a small contango, is moving to a narrow backwardated structure.

"Some volumes are heading East, this will help thin out the market," a market source said.

Some 260,000 mt of LPG is being exported from the Mediterranean to Asia in July, with 229,000 mt destined for Southeast and Eastern Asia, according to Kpler data. All of the 229,000 mt was exported from Algeria during the month, and they represent the highest volumes from the Mediterranean to Asia seen by Kpler since it began reporting the data in 2014. The volumes were almost equally split between propane, which was up 40.24% on the month, and butane, which rose 94.92% on the month, Kpler data showed July 26.

Algerian LPG exports to Southeast and Eastern Asia have been steadily increasing since the start of 2022, when 42,000 mt was recorded in January.

While seasonal factors are lowering demand in the Mediterranean and the Lavera refinery in France storing LPG in this period, Algeria is also producing more LPG during these summer months, trade sources said.

"We normally see more [production] in summer [from Algeria], they have large storage and limited trade to Morocco," a second source said.

Better netbacks

"Netbacks to the East are arguably better," another propane trader said, referring to healthier arbitrage margins in Asia.

Other LPG sources said low demand in Northwest Europe and the Mediterranean were the key reasons for higher shipments to Asia, disputing the notion that Algerian production is currently higher.

"Algeria is long on butane, so it makes sense that the product will go East. Some product headed to Europe, but there isn't enough demand for butane in those regions," another LPG trader said.

China imported 65,000 mt of Algerian LPG in June, down 13.1% on the month, Chinese General Administration of Customs data showed. In H1, China imported 205,000 mt of LPG from Algeria, up 28% on the year, making the North African producer the ninth-biggest exporter to China, the customs data showed.

Traders said that on average two Algerian cargoes were imported monthly by Asian buyers this year, up from one monthly cargo in 2021.

At least one major Chinese petrochemical maker -- Wanhua Chemical -- was heard to have recently started importing LPG from Algeria, trade sources said.

They said that Algerian LPG quality is largely similar to those from the Middle East and the US and the price is based on the Sonatrach Contract Prices.

The flows to Asia look set to continue, with Algeria's state-run Sonatrach heard to have been able to sell a 44,000-mt evenly split cargo for loading over the last 10 days of August, an Asian market source said.

The butane large cargo market is beginning to rally amid improving outlook for activity in the Mediterranean and Northwest Europe for August.

Market sources see an improvement in August with CIF ARA values for the month having risen to around 90% as a percentage to naphtha for the butane market.

LPG prices have been falling in Asia and the Middle East since hitting eight-year highs in early March.

CFR North Asia propane was assessed at $710.5/mt on July 27, down from $1,005/mt on March 9, while CFR North Asia butane was assessed at $698.5/mt, down from $1,039.5/mt March 7, data from S&P Global Commodity Insights showed.

Saudi Aramco's term July contract prices were at $725/mt for both propane and butane, down from the April CPs at $940/mt for propane and $960/mt for butane.

In contrast, Sonatrach had lowered its propane contract price for July by $30/mt on the month to $700/mt and cut its butane contract price by $175/mt to $650/mt.

Attractive freight

The naphtha arbitrage from the Mediterranean to the East of Suez remains open as more volumes are coming from the Black Sea amid cheaper freight.

"Probably because all the Russians barrels [have] lately found a home in Asia for obvious reasons," one trade source said.

"But also more competitive freight to go there (Asia), versus expensive MR freight to go to the Mediterranean, or Mediterranean to the North," the source added.

Russian barrels from the Mediterranean are being exported from the port of Tuapse, in the Black Sea, the source said. In early June, the Tuapse refinery on the Black Sea resumed operations after a stoppage in March as it could not ship ready production, S&P Global reported earlier.

Following months of no exports, some 124,000 mt of naphtha was shipped from the port in June. The forecast to date for July is about 192,000 mt, Kpler shipping data showed.

Mediterranean-Japan freight rates on 80,000 mt basis dropped to $4 million lumpsum July 26 after reaching all-time highs of $4.75 million lump sum June 17.

One reason for such open arbitrage is that Russian naphtha was heard to be trading at steep discounts to restricted-origin material, even reaching a spread above $200/mt, said Moscow-based consultancy Petromarket.

"Surely at those prices they [Russians] can clear it to East Asia," said another source. "Saying that, cracker demand is abysmal there."