Analysis: Asia petrochemical makers eye $60/mt propane-naphtha discount before switching feedstock

North Asian petrochemical makers are waiting for the usual arbitrage to reopen to resume eastbound US LPG flows after the cancellation of multiple June-loading cargoes, and for the propane-naphtha discount to deepen further, before switching to LPG as feedstock, traders and end-users said.

The cancellations have led to a shortfall of US LPG cargoes in North Asia, which had been preferred in recent months due to their lower price, and meant buyers were having to consider taking more Middle Eastern cargoes that have been in greater supply in Asia in recent months, the sources said.

The discount of FEI propane to Mean of Platts Japan naphtha assessment needs to widen to $60/mt before they would consider switching to propane and butane as alternate feedstocks, they said.

The propane-naphtha discount stood at $57/mt May 25, a level which would have normally prompted petrochemical makers to shift to LPG from naphtha. "[We] will wait till the discount widens to at least $60/mt," one North Asian petrochemical maker said.

North Asian petrochemical makers, led by South Korean and Japanese importers, had sought or bought LPG as feedstock in the week to May 20, when the discount of June FEI propane to MOPJ naphtha stood at $54.25/mt May 20, before pausing when the discount narrowed to $39.50/mt on May 21, according to S&P Global Platts data.

The discount crunched further to $33.75/mt on May 27 as CFR North Asia H2 June-delivery propane jumped to a near two-month high at $573/mt, while naphtha was supported by growing demand from new cracker startups. Brokers indicated the June FEI propane-MOPJ naphtha discount on May 28 at $42.46/mt.

The startups were attracting naphtha arbitrage flows from North America, which rose almost 44% month on month to a four-month high of 686,000 mt for May loadings, according to market sources and Platts' trade-flow software cFlow.

While North Asian importers remain keen on LPG as a substitute, they are "not very active at this kind of price level," a North East Asian trader said. "Minus $60/mt could be the turning point. We need to see more supply from the US for this to happen."

Trade sources expect the US-Asia arbitrage to start reopening gradually amid an easing of rates for Very Large Gas Carriers, or VLGCs, and rebounding Asian propane prices.

With up to 10 eastbound cargoes slated for June loading in the US canceled on the closed arbitrage up to May 21, VLGC rates on the Houston-Chiba route have started retreating, falling by $5/mt May 27 to $90/mt, while shipping sources said Middle East-Japan freight is set to fall to $56/mt May 28, a three-week low.

"Yes, the arbitrage has opened a bit more," an East Asian trader said. "Probably we are seeing less cancellations, or people canceled to buy and resell the cargo."

As the June-loading program was mostly completed, a US-based source said discussions for the July arbitrage were slightly better than for June.

US supply not as tight

US market sources said four to five term LPG cargoes for loading ex-US in June were reportedly canceled and that a few more could also be canceled.

However, some of these cargoes may be offered in the spot market instead, therefore making LPG supply to East Asia not as tight as could be perceived.

Total US propane exports rose 116,000 b/d to the fourth-highest year-to-date total in the week ending May 21, Energy Information Administration data showed May 26.

Propane exports touched 1.41 million b/d, the fourth time year-to-date that exports surpassed 1.4 million b/d. The continued strength of exports plus modest inventory levels have triggered concerns over a pending shortage of propane stocks during winter.

Propane inventory declined 359,000 barrels to 44.1 million barrels, the first draw following four consecutive weekly builds. Propane stocks remain more than 20 million barrels below the same week a year earlier and are more than 16 million barrels lower than the same week in May 2019.

S&P Global Platts Analytics data showed 13 VLGCs loaded from US ports in the week ended May 21, three less than the previous week. Nine were Asia-bound, including two for South Korea and one for China.

Asian traders said even with lower US exports to the East, regional end-users are well supplied with LPG from the Middle East. Major producers Qatar Petroleum, ADNOC and Saudi Aramco have accepted term nominations for June-loading cargoes without cuts and delays, while Kuwait Petroleum Corp. has sold five cargoes for June to early July loading.

FOB Middle East differentials had been languishing in discounts of low to mid-teens to the June Saudi Contract Prices, or single-digit discounts to July CPs, as seen in KPC's latest export tender of a mixed cargo awarded for June 30 July loading.

Iran has also exported around 400,000 mt/month to Asia in April and May. US, European and Iranian negotiators meeting this week for a possible final round of talks are also stoking optimism for a nuclear deal that would lead to a resumption of Iranian oil and LPG exports.

The US shortfall could be "offset by more Middle Eastern exports," the North Asian petrochemical maker said.