Russian-origin naphtha exports to Asia rebound in July despite sanctions

Russian-origin naphtha exports to Asia rebounded in July despite an exclusion clause in many purchase contracts in the wake of sanctions on the country that have led to logistical difficulties and payment issues, market sources said.

Russian-origin naphtha cargoes to the Asian market from the West of Suez rose to 335,000 mt for the July-loading program, from 72,000 mt for the April-loading program, with cargoes landing in the Middle East, Straits and Far East regions, according to data from market sources and Platts cFlow ship and commodity tracking software from S&P Global Commodity Insights.

Prior to Russia's invasion of Ukraine in February, Asian buyers were mainly buying heavy full-range naphtha from Russia, with light naphtha suitable for cracker feed making up a small portion of the Russian inflows, sources said.

Many market participants avoided Russian-origin cargoes following the start of the Ukraine war and placed exclusion clauses in their purchase tenders.

That led S&P Global to issue a clarification April 8 that the Platts oil price assessments reflected only the merchantable material in the physical spot market. Platts said a significant portion of the Asian naphtha spot material of Russian origin was no longer deemed merchantable and the Platts Asian naphtha assessments no longer reflected Russian-origin product. The Platts Market on Close trade performance required that the documentation proving the origin of the material was not unreasonably withheld.

The 2022 open-specification naphtha, or OSN, contract excluded the delivery of cargoes, which were refined, produced, manufactured, processed in, exported from, or produced through a blending process that uses material or components that had been refined, produced, manufactured, processed in or exported from the Russia Federation, Crimea, the Donetsk People's Republic or the Luhansk People's Republic in Ukraine.

The version of the contract was issued by consultancy Asdem prior to an OSN panel meeting May 30. Asdem Asia provides legal and arbitration services to the Asian naphtha industry, including the administration of the OSN contract.

Naphtha demand eases

Overall naphtha volumes from Europe to Asia have fallen as Asia's naphtha end-users have slashed cracking run rates since March anticipating higher landed premiums to weigh on downstream petrochemical margins following sanctions on Russia.

Heavier naphtha grades used as splitter feedstock have faced supply tightness, with offers on a CFR basis as high as premiums of about $100/mt to Mean of Platts Japan naphtha assessments amid sanctions, sources said. The premiums have eased since, but heavy full-range naphtha remains at a premium to the typical cracker-feed naphtha for second-half August delivery. South Korea's Hanwha Total bought OSN at a premium of $8/mt to MOPJ naphtha assessments, CFR, and heavy full-range naphtha at a premium of $24-$26/mt to MOPJ naphtha assessments, CFR, according to sources.

Asia's naphtha-fed steam crackers had cut run rates to as low as 68% in March and were still operating at lower levels in July with run rates ranging from 72% to 90%. Some operators with multiple units were mulling shutting some units and raise operations at others to improve economics.

The Asian naphtha market is long on cracker-feed naphtha grades currently, as domestic naphtha supply has risen following a rally in cracking margins for transportation fuels that have boosted refinery output. The CFR Japan naphtha physical crack against the front month ICE Brent crude oil futures turned negative to minus $22.70/mt at the Asian close July 21, weakening $51.45/mt week on week, S&P Global data showed.

Poor downstream margins and concerns about fresh COVID-19 lockdowns in China, a key petrochemical consumer, have weighed on market sentiment. Sources said demand was not expected to recover significantly, even as overall arbitrage volumes increase following the end of the spring turnaround season at North Asia's naphtha-fed steam crackers.

Naphtha shipments to Asia:

* Final calculations for July pending

Data from: Market sources, Platts cFlow