Sentiment improves among Asian ethylene sellers despite thin production margins

Selling sentiment in the Asian ethylene market improved Jan. 25 on the back of higher discussion levels, as several operating rate cuts due to higher naphtha prices in the region have led to supply tightness.

"There were too many operating rate cuts starting December 2021, which has resulted in a tighter supply pool. It is natural for sellers to look higher as buying interest for late-February and March arrivals have increased," said a trader based in Northeast Asia.

Some participants said ethylene prices might have bottomed out, given the overall tight supply in Asia.

A recent price increase in the Chinese domestic market supported sentiment as well, with some sources saying buyers needed to replenish inventory levels as buying was limited in December amid weakness in derivative markets.

Ethylene-naphtha margin remains unprofitable

Despite the improving sentiment, steam cracker operators are closely watching the key CFR Northeast Asia ethylene to C+F Japan naphtha spread, which stood at $203.25/mt at the Jan. 25 Asian close, down 27.89% since Jan. 3, Platts data showed. The unprofitable ethylene-naphtha margin has been below the typical breakeven level of $350/mt since Dec. 23 at $313/mt, Platts data showed, and prompted steam cracker operators to reduce run rates.

Asian steam crackers slash run rates

At least one Asian naphtha-fed steam cracker reduced run rates in January, and another Asian steam cracker told Platts that he will make the move towards the end of the month, Platts reported earlier.

"We have no immediate plans to increase our cracker run rates," said a producer based in Northeast Asia. "We are still losing money on ethylene production and it will be difficult to do so, given how high naphtha prices are at the moment."

List of steam crackers with lower operations

Source: S&P Global Platts

Low ethylene, high naphtha prices

Weakness in the ethylene derivative market has turned some buyers cautious about ethylene purchases while others expressed interest at current price levels, but said that offers were few and far between.

Prices for spot ethylene were last assessed at $980/mt CFR Northeast Asia and $995/mt CFR Southeast Asia Jan. 25, Platts data showed.

Meanwhile, the benchmark C+F Japan naphtha cargo has risen $38.625/mt since Jan. 3 to $776.75/mt on Jan. 25, Platts data showed.

Market sources said high naphtha prices have pressured ethylene production.

"It is quite unusual for naphtha prices to be this high for so long, and unfortunately, prices of ethylene did not follow the naphtha increases because the downstream markets are not doing well so our buyers were unwilling to accept the increase. It has been a tough few months for us," said a producer based in Northeast Asia.

Propane as an alternative cracker feedstock

Meanwhile, weak propane prices have kept the propane-naphtha spread in negative territory for the seventh consecutive session, further weighing on naphtha demand. The spread between CFR North Asia propane and CFR Japan naphtha rested at minus $28.25/mt at the Asian close Jan. 25.

The spread is tracked closely by end-users, as LPG produces more olefins than naphtha feedstock. The propane to naphtha discount may encourage end-users to switch to LPG as an alternate feedstock, which typically becomes economically viable as a steam cracking feedstock when its price is 90% that of naphtha, or lower.