Northeast Asia's steam crackers reverting to LPG feedstock after 7-month hiatus

Northeast Asia's steam cracker operators are gradually returning to using LPG as feedstock as the February propane discount to Mean of Platts Japan naphtha assessments deepen towards $61/mt, trade sources said, replacing naphtha, which has been feedstock of choice for the past seven months.

Platts, part of S&P Global Commodity Insights, assessed the February FEI propane to MOPJ naphtha discount at $60.50/mt Jan. 23, the steepest since June 8, 2023 when the discount was $81.75/mt.

Since June 8, the FEI propane-MOPJ naphtha discount had been narrowing and the differential flipped into a premium as wide as $100/mt Nov. 9, according to S&P Global data.

LPG typically becomes economically viable as a steam cracking feedstock when its price is 90% that of naphtha, or lower.

With Platts-assessed CFR North Asia propane at $609.50/mt and C+F Japan naphtha at $683.25/mt Jan. 23, propane was 89.2% the cost of naphtha, making propane economically viable as an alternative steam cracking feedstock.

The deepening discount prompted South Korean petrochemical makers, such as LG Chem, and Chinese petrochemical makers to use some LPG in their feedstock mix in order to maximize margins, trade sources said, having grappled with losses for more than a year.

"They have been trying to [switch to LPG] already, simply because of a lack of naphtha in the prompt," a Singapore-based trader said.

Northeast Asia end-users switch

South Korea's LG Chem plans to start switching 5% of its steam cracking feedstock from naphtha to LPG from the second half of February, a source with knowledge of the matter said.

The company operates two steam crackers at Yeosu and one cracker at Daesan, with a combined ethylene production capacity of 3.35 million mt/year.

Taiwan's Formosa Petrochemical Corp. is already cracking some LPG, a trade source said. Formosa issued a tender seeking 44,000 mt of evenly-split LPG for Feb. 25-March 5 delivery to Mailiao.

The tender closes Jan. 24, though the cargo will be used for residential purposes rather than cracking, the source said.

"[The margins] look still negative, but LPG cracking should be better," the source said when asked about the margins for cracking LPG and naphtha.

The Platts-assessed spread between CFR Northeast Asia ethylene and CFR Japan naphtha physical narrowed $6/mt on the day to $211.75/mt Jan. 23, S&P Global data showed, with margins remaining in negative terrain.

The typical breakeven spread for non-integrated producers is $250-$350/mt, and $250/mt for integrated producers, sources said.

China's Shanghai Jinshan recently bought via a tender 45,000 mt of propane at a discount in the $40s/mt to February MOPJ naphtha assessments, for March 7-15 delivery ex-ship, Yangpu, Hainan, trade sources said.

South Korean trader E1 Corp., which normally buys LPG for the country's petrochemical makers, recently bought by a tender 23,000 mt of butane for H2 February and/or H1 March delivery, though the price and seller was not immediately known.

With the premium of butane to propane valued at $10/mt Jan. 23, the discount of February FEI butane to MOPJ naphtha was valued at $50.50/mt, S&P Global data showed.

E1 also bid for 23,000 mt of propane for H1 March delivery in the physical market Jan. 23, at FEI March plus $8/mt, which equated to $607/mt.

Naphtha firms; LPG buyers cautious

The Asian naphtha market has been on a bullish run as supply was expected to tighten due to the recent fire outbreak at Russian energy company Novatek's Ust-Luga terminal on the Baltic Sea, and anticipated cargo delays arising from Western cargoes traversing via the longer Cape of Good Hope route, traders said.

"Yes, [there should be supply tightness], and since cargoes are avoiding the Red Sea, there may be further delays," a naphtha market source said.

The front-month East-West naphtha spread widened $4/mt, or 12.50%, on the day to $36/mt at the Jan. 23 close, as vessels continue avoiding the Red Sea amid escalating tensions.

"Some of the fixtures are now only being done basis the Cape option, with no Suez option available at all," a senior executive at a major oil tanker company said.

Compared with the more strategic Suez route, the Cape route adds up to 14 days to voyage durations, S&P Global reported earlier.

Reflecting the stronger sentiment in the naphtha complex, the front-month February-March MOPJ naphtha swaps time spread widened $1.75/mt on the day to $14/mt at the Jan. 23 close.

While the LPG market has seen steady demand in recent weeks, buyers were cautious amid a mild winter and kept bids low on hopes that an open arbitrage would bring healthy US volumes to Asia to counter any shortfall in Middle Eastern supply, trade sources said.

The Platts-assessed CFR North Asia propane averaged $621.22/mt over Jan. 2-23, down from $639.83/mt over December and $702.38/mt over November, S&P Global data showed.

Platts assessed CFR North Asia propane at $602/mt on Jan. 10, 16 and 17, the lowest since touching $595.50/mt on July 31.