Europe-Asia naphtha arbitrage slips to 3-month low for August loadings on tight supply

Tight supply in Europe has decreased the flow of arbitrage naphtha into Asia for the second consecutive month for the August loading program, and the upcoming volumes for the September loading program is slated to remain thin due to a decrease in demand from Asia's end-users for October.

August-loading Europe to Asia naphtha shipments were 1.585 million mt, down from 1.64 million mt for July-loaded volumes, according to data from market sources and S&P Global Platts cFlow data. This has brought Europe to Asia shipments to a three-month low for the August loading program, Platts data showed. In comparison, the June loading volumes were 1.8 million mt which was around a two-year high, while May volumes were 1.265 million mt.

"The recent drop in loadings from Europe to Asia is in line with our projections of weaker demand in September-October primarily from the South Korean olefins sector," said Eshwar Yennigalla, senior analyst at Platts Analytics.

The lower volumes could continue for the September loading program, as the key spread between front month September naphtha C+F Japan cargo versus CIF NWE cargo had dropped from $12/mt at the Asian close Aug. 26 to $11.50/mt at the European close on Aug. 26, which was over an eight-week low, Platts data showed. The spread was last at this level on June 29's European close.

"For October, we project South Korean demand for naphtha to drop by close to 10% to 1.27 million b/d as a result. We expect heavy naphtha demand into aromatics extraction to decline on the quarter in Q3 2021, while the weaker outlook extending into October amid weakening downstream margins," said Yennigalla.

This crunch in the East-West spread was due to a weaker naphtha market in Asia, due to lower demand for the October delivery cycle because of a major scheduled turnaround. LG Chem's Daesan steam cracker, which can produce 1.2 million mt/year of ethylene and 450,000 mt/year of propylene, will undergo maintenance.

Asia demand falls for October

Asia's naphtha market had seen the cash differential for CFR Japan spot naphtha parcels with a minimum 65% paraffin content rise from over an eight-month low of minus $2/mt on Aug. 23, against benchmark Mean of Platts Japan naphtha physical, Platts data showed.

This had end-users in no hurry to move for first half October purchasing, and tenders from petrochemical makers for cracker-feed naphtha only emerged on Aug. 24, even though the trading cycle had begun on Aug. 16.

The start of trading activity had since led to a slight recovery in the CFR Japan cash differential, which was last assessed at minus 25 cents/mt on Aug. 26, Platts data showed.

Tepid chartering activity for arbitrage

Chartering activity was ongoing for the September-loading program, with six Long Range II tankers slated to load around 480,000 mt of naphtha, booked for Europe to Asia naphtha cargoes loading over Sept. 1-14, said sources.

Europe to Asia arbitrage from the September program are likely to remain slim as not only was there less cargo requirement from Asia in October, but also limited availability of cargoes from Europe. Europe's petrochemical makers were still maximizing use of naphtha as a cracker feedstock due to the high price of rival feedstock LPG.

Asia's naphtha end-users are also able to seek supplies from the American continent, from which the August loading shipments had risen month on month, easing some of the supply constraints faced by end-users importing from Europe, Platts data showed.

"September-arrival Western arbitrage is around 2.5 million mt, this is due to more US Gulf coast shipments," said a Singapore-based naphtha trader.

The tepid interest for the Europe to Asia arbitrage moves saw freight levels remain rangebound for the LR2 Mediterranean-Japan voyage, which was had averaged at $1.649 million over Aug. 2-26, and was last assessed at $1.625 million on Aug. 25-26, Platts data showed.

A naphtha cargo from Europe typically takes around a month to arrive in North Asia, if the vessel transits via the Suez Canal, shipping sources said.

Europe to Asia naphtha fixtures

Key: NA= naphtha, rnr= rate not reported, cnr= charterer not reported

Source: Industry sources, S&P Global Platts cFlow