Asia naphtha, LPG rally on winter demand; propane premium widens on supply fears

Singapore — Asia's naphtha and LPG markets have been bullish in recent weeks, supported by strong demand but inclement global weather and shipping delays at the Panama Canal are driving up propane prices faster than naphtha, S&P Global Platts data showed.

Naphtha has seen robust demand on positive olefin margins, as three North Asia naphtha-fed steam crackers, with total ethylene production capacity of 2.499 million mt, set to return online in January and February. Of these, 335,000 mt would be fresh capacity from YNCC's No. 2 steam cracker at Yeosu.

CFR Japan naphtha physical crack spread against front-month ICE Brent crude futures reached over two-year highs of $102.30/mt at the Jan. 8 Asian close. It was last higher on Oct. 3, 2018 at $103.35/mt, Platts data showed.

Physical crack was assessed at $101.60/mt at the Jan. 11 Asian close, as crude gains outpaced naphtha, Platts data showed.

Benchmark naphtha C+F Japan cargo was assessed up $5/mt day on day at $518/mt at the Asian close Jan. 8, and was last higher Jan. 29, 2020, at $519.625/mt, Platts data showed.

LPG versus naphtha physical spread has stayed positive since Sep. 30, 2020. CFR North Asia propane against C+F Japan naphtha cargo was at a $158.50 premium Jan. 11, stable on the day, Platts data showed.

FEI propane swaps premium to Mean of Platts Japan naphtha assessment was at the widest in recent years at $151.75/mt Jan. 4, after switching from discounts on Sep. 30, 2020, Platts data showed. The premium was at $124.5/mt Jan. 11, narrowing $1.5/mt on the day, Platts data showed, making LPG uneconomical as alternate petrochemical feedstock and keeping naphtha in demand by Asian steam crackers. LPG becomes viable as steam cracking feedstock when it is 90% naphtha price, or lower.

Positive olefin margins have driven naphtha demand significantly, as the spread between CFR Northeast Asia ethylene and CFR Japan naphtha physical prices was at $542/mt on Asia's Jan. 11 close, up $42/mt week on week, Platts data showed.

The ethylene/naphtha spread has been above $350/mt -- the breakeven for non-integrated producers -- since Sep. 3, 2020, and averaged $533.94/mt over December 2020, Platts data showed.

CFR North Asia propane has been rising to $677/mt Jan. 11, the highest in two years and three months, Platts data showed, eroding propylene margins, which shrank to nearly $400/mt end-December from highs of $1,000/mt and are expected to narrow further, according to S&P Global Platts analytics. The propylene-propane breakeven is almost $150/mt.

FRIGID GLOBAL WEATHER

Heating demand for propane is stoked by harsh winter in China, Japan and South Korea, and is expected to last through January.

Improving demand from Chinese propane dehydrogenation plants lent support, but the higher-than-expected January Saudi Contract Prices and strengthening physical prices would narrow PDH margins from strong levels in December, leading to reduced demand for costly feedstock and lower operating rates, trade sources said.

China's PDH plants operated at an average 81% of capacity in December, down from 85% in November, Platts calculations based on data from domestic information provider JLC, showed.

Hebei Haiwei and Zhangjiagang Yangzijiang reduced December runs on insufficient feedstock and turnaround, respectively, while Tianjin Bohai and Dongguan Juzhengyuan raised rates after maintenance, data showed.

Chinese PDH units' theoretical processing margin was estimated at Yuan 1,765/mt ($270/mt) in December, versus revised value of Yuan 1,397/mt in November, Platts calculations showed, driven up by higher domestic propylene prices in December, though propane import costs also rose.

February Saudi CP propane swaps was indicated Jan. 12 at $606/mt, up $1/mt day on day.

Traders and end users expressed concerns that extended waiting times at the Panama Canal would delay January US cargo arrivals to Asia, estimated at 3.2 million mt.

Average waiting times for non-booked Neopanamax VLGCs have been increasing since early December, peaking at 14 days for southbound transit at the turn of the year, said brokerage Gibson.

"Lengthy waiting times create a backlog of VLGCs waiting to transit the Canal and disrupt the loading programs in the US Gulf. Currently there are four VLGCs waiting for the northbound transit and nine VLGCs for the southbound transit," it said in a Jan. 7 report, adding waiting times are expected to average 6.5 days for northbound and nine days for southbound transits in January, improving from December, though increasing number of transits and fog continue to test the new locks' limits.

Such delays and vessel drydocking have propelled VLGC rates on the Persian Gulf-Japan route to $119/mt Jan. 12, the highest since hitting $121.5/mt on July 30, 2014, Platts data showed.

Lofty rates and limited vessels are exacerbating cost pressures, while limiting LPG supply to Asia, traders said.

Frigid Western weather at the onset of the polar vortex also stirs worries that US cargoes could be pulled to Europe, though ample Middle East supply is expected to compensate for US shortfalls, traders said.