Europe's Jan-loading naphtha volume to Asia falls, but US to plug shortfall

Singapore — Asia's growing appetite for arbitraged naphtha will continue to be satisfied by Europe and the US in the near term, despite the strong pull for the feedstock by Europe's petrochemical markets, which has consistently reduced the volume of naphtha heading East in the last few months, according to data from market sources and cFlow, Platts trade-flow software.

Fixtures of January-loading naphtha arbitraged from Europe to Asia totaled 1.41 million mt, of which 235,000 mt was originally for loading in December, the data showed. As a result, December-loading naphtha totaled 1.455 million mt, lower than the 1.632 million mt in November.

In line with lower arbitrage volumes from Europe, January naphtha loadings from Tuapse was 240,000 mt, down 20% on the month, the latest loading program showed.

HIGH UTILIZATION RATES BY CRACKERS IN EUROPE, ASIA

Asia's naphtha-fed steam crackers are due to come online with fresh capacity in 2021, the latest being YNCC's No.2 cracker that restarted with an expanded capacity of 915,000 mt/year of ethylene this week.

Incremental demand for lighter naphtha grades, suitable as cracker feedstock, would amount to 125,000-150,000 mt/month, which is expected to be supplied from the US. Around 800,000 mt of US Gulf Coast naphtha is due to arrive in the Far East over February, and together with the January-loading European volumes, would tip the total to over 2 million mt, easily satisfying Asia's expanded demand for cracker feedstock naphtha.

As arbitrage inflows begin to offset the fresh demand from crackers coming online over H2 January, the backwardation in the Asian naphtha market has begun to flatten. Platts had assessed front-month February-March Mean of Platts Japan naphtha swaps spread at $5.50/mt at the Jan. 20 Asian close, down 75 cents day on day.

Yet, olefin margins remain well within positive territory for petrochemical producers -- the key CFR Northeast Asia ethylene spread to C+F Japan naphtha remains above the typical breakeven spread for non-integrated producers of $350/mt, as it was assessed at $444.625/mt on Jan. 20, down $30.50/mt day on day, Platts data showed.

Borealis' cracker in Stenungsund, Sweden, restarting operations on Jan. 12, and Ineos Dormagen, Germany, restarting on Jan. 9, along with Europe's other crackers running at almost full capacity, could ease the tightness in the continent's downstream petrochemicals markets. However, this would result in more naphtha being absorbed domestically, leaving much less for the Far East.

OVERVALUED PROPANE PRESSURES NAPHTHA

The common indicator of arbitrage economics -- the front month East-West spread -- was relatively stable over January, and was last assessed at $15.50/mt at the European close on Jan. 20, Platts data showed. This coupled with strong positive basis European cash differentials indicated healthy interest for exports to Far East markets, sources said.

However, an overbought propane in anticipation of cold temperatures, particularly in Asia, triggered a steep price correction cascading into the European and Asian naphtha markets as traders unwound long positions. The premium of CFR Japan naphtha cargo swap over the CIF NWE equivalent closed at $15.50/mt on Jan. 20, down 11.15% on the month, and the lowest since Nov. 30, 2020, Platts data showed.

High US LPG volumes were drawn to Asia, which had reduced output, shutting the US-Europe arbitrage window and inflating the propane to naphtha differentials to multi-month highs. The market, however, had possibly overshot fair value and corrected itself with a $53.25/mt decline in the past two days. February CIF NWE propane swap contract against the equivalent naphtha closed at minus $17.75/mt on Jan. 20, while February CIF NWE naphtha crack spread collapsed 70 cents/b to close at minus 15 cents/b, Platts data showed.

"Propane now is a typical market where everyone and even their grandmother was long," a Europe-based source said.

Despite the price shock, Europe's feedstock demand remains robust and naphtha is not expected to exit the cracking pool in the near term. Petrochemical producers' margins remain strong as a lack of blending demand capped naphtha prices. Ethylene and propylene remain at 5% and 10% premiums, respectively, to the industry's monthly settled contract prices.

Propane volumes will likely be absorbed, balancing out propane to naphtha differentials, as temperatures in Asia's main feedstocks outlets -- Japan, China, and South Korea -- are forecast between minus 7 degree Celsius and 15 C by end-January.

Europe to Asia naphtha arbitrage fixtures:

Data from: Market sources, S&P Global Platts cFlow