Asian steam crackers mull switch to cheaper LPG as poor margins persist

A number of Asian petrochemical makers, notably in South Korea, are considering switching to propane as steam cracker feedstock as LPG prices continue to hover at sharp discounts to naphtha, in a bid to improve yields and margins that have stayed poor over the past two years, market sources said.

The discount of April FEI propane swap to the Mean of Platts Japan naphtha was valued at $68.75/mt at the Asian close March 9, S&P Global Commodity Insights data show.

The discount was last steeper on March 6, at $79.25/mt, but was even deeper at $110.75/mt on May 17, 2022, S&P Global data showed.

Buteven at such steep discounts in May 2022, north Asian petrochemical makers did not turn to LPG as a substitute due to low prices of ethylene -- the main yield from cracking LPG. At the time, naphtha-fed steam crackers were in search of valuable gasoline-blending component amid the summers, while run rates were low to minimize operating losses.

"Economics and olefin margins remain poor and run rates were still as low as of last month. We might consider the switch for feedstock," a regional South Korean end-user said recently.

Asian steam cracker operators are likely to turn to LPG amid the current discount and when LPG is 90% or lower than naphtha, which has been the typical level deemed economically viable to switch beyond the $50/mt threshold to the petrochemical makers' appetite.

Asian steam crackers can replace 8% to 18% of naphtha as feedstock, with LPG depending on certain upgrade in their units.

During early March, Taiwan's Formosa Petrochemical Corp. bought 46,000 mt of mixed LPG for second-half April delivery, via a tender, at a discount in the low $40s/mt to the April MOPJ naphtha. "The economics and end-products demand would determine our future purchases, as we are an opportunistic buyer," a company source said.

Ample LPG supply is expected to be provided with minor delays for Qatar Petroleum's acceptances of April-loading term cargo nominations. Lifters were heard to nominate for earlier dates facing a persistently backwardated market, though Qatar would not be able to meet the strong demand for early-month loadings.

Shipments from Iran -- mainly China-bound -- remained healthy. Saudi exports were seen normalizing following Yanbu terminal maintenance over end-January to early March, when supply was limited, even as US flows to Asia are steady, keeping CFR North Asian propane at around two-month lows March 8 at $677.5/mt, S&P Global data showed.

The physical spread between CFR North Asia propane and CFR Japan naphtha flipped to a discount, as it narrowed $98.88/mt month on month to minus $38.50/mt at the March 9 Asian close, S&P Global data showed.

The spread is tracked closely by end-users, as LPG produces more olefins than naphtha feedstock, sources said.

"We are currently considering switching to LPG, given the discount to naphtha, mostly stemming from Natural Gas Liquids prices, going down quite a lot," a South Korea-based end-user said.

However, some petrochemical makers are steadfast on not making the switch as the main yield of cracking LPG is ethylene, while their preference is for propylene.

Naphtha cracking yields 0.32 of ethylene, while LPG cracking increases it to 0.36-0.40, market sources said.

Propylene production yield from naphtha is at 0.13, versus 0.18-0.20 from cracking LPG.

Some market sources said the decision to switch to LPG from naphtha as steam cracking feedstock lies on the desired output that the organization requires.

Naphtha supply rising

Even though naphtha prices held above LPG, the regional naphtha market remains weak on higher supply from the Middle East and India, while demand is hampered by thin olefin production margins.

The key CFR Northeast Asia ethylene-CFR Japan naphtha physical spread, closely watched by petrochemicals producers, widened $8/mt day on day to $255.50/mt at the March 9 Asian close, reaching a near three-month high and above the typical breakeven spread of $250/mt for integrated producers. But this still lags the breakeven spread of $300-$350/mt for non-integrated producers, S&P Global data showed. The spread was last higher on Dec. 12, 2022 at $270.50/mt.

Naphtha supply had exceeded initial expectations, traders said, with arbitrage volumes in March from Europe to Asia forecast around 1.3 million mt, compared with prior expectations of around 1 million mt.

"We are also seeing more prompt [sell] tenders as well. Naphtha demand has not improved. It is a matter of supply now," the trader said.

This came after the C+F Japan naphtha hit a seven-month high March 6 on the back of supply tightness, S&P Global reported earlier.

Meanwhile, South Korea's naphtha-fed steam cracker operations were slated to average 87.96% of online capacity in March, up from 75.89% in February amid thin olefin production margins, S&P Global reported earlier.

Though some operators were raising run rates from February, this was aimed at building ethylene inventory ahead of turnarounds in April and May, rather than in response to a recovery in margins, market sources said.