Ethylene-naphtha spread tumbles to 20-month low on bearish ethylene complex

A weak ethylene market in Asia has crunched the key ethylene-naphtha margin watched by steam cracker operators to a 20-month low, S&P Global Platts data showed Jan. 18.

The lackluster Asian ethylene complex was led by squeezed downstream margins, with key downstream styrene monomer (SM), ethylene glycol (EG), and high-density polyethylene (HDPE) spreads persistently in the negative region. Meanwhile, the naphtha market was also bearish on decreased demand from steam crackers.

The CFR Northeast Asia ethylene and C+F Japan naphtha narrowed $88.25/mt on the week to $143/mt at the Asian close Jan. 18, Platts data showed, with levels last lower on May 5, 2020 at $134.50/mt, Platts data showed.

As this was well below typical breakeven levels of $300-$350/mt for non-integrated producers, steam crackers have been forced to reduce operation rates, with at least one Asian steam cracker making the move in January, Platts earlier reported. The ethylene-naphtha spread has been below $350/mt mark since Dec. 23, Platts data showed.

Weak downstream margins weigh on ethylene

Buying sentiment in the Asian ethylene market has been bearish, as key buyers remained concerned about eroded derivative margins.

Non-integrated buyers cut downstream operating rates for SM, MEG, and HDPE in Q4 2021 amid sluggish demand and falling prices, which reduced buying incentives for spot ethylene.

"Our MEG run rates are around 70% at the moment, and margins are really weak, so we are not looking at additional ethylene purchases although prices have started to fall," said a buyer based in Taiwan.

Several ethylene producers in Northeast and Southeast Asia have cut run rates at crackers to manage growing inventory levels amid lackluster demand, with current operating rates estimated at 80-95% across Asia.

Offers have been few and far between, with producers citing concerns on increasing naphtha prices and falling spot ethylene values.

"We are not making any offers at the moment, as we have already loaded down due to the losses we are making on ethylene production and are not urgently looking to sell our current inventory," said a producer based in Northeast Asia.

Naphtha bearish on falling steam cracker demand

Amid the squeezed ethylene-naphtha spread, the Asian naphtha was soft on decreasing demand from steam crackers.

The unhealthy ethylene-naphtha spread have forced naphtha-fed steam crackers in Asia to reduce operating rates. At least one Asian steam cracker reduced run rates in January, and another Asian steam cracker told Platts it will make the move in the end of the month, Platts reported earlier.

The ethylene-naphtha spread has been below the $350/mt mark since Dec. 23 at $313/mt, Platts data showed.

The softer naphtha market was reflected in the CFR Japan naphtha physical crack against front-month ICE Brent crude futures, which fell $8.25/mt week on week to $123.50/mt at the Jan. 18 Asian close, Platts data showed.

Mirroring the bearishness, the front month C+F Japan naphtha timespread -- an indication of near-term sentiment -- narrowed $1.50/mt day on day to plus $8.75/mt at the Asian close on Jan.18. This represents a 23.91% decline since the start of the month when the spread was assessed at $11.50/mt, Platts data showed.

Further along the derivatives curve, the Q1-Q2 quarterly C+F Japan naphtha spread was assessed at $25.92/mt, down 50 cents/mt on the day.