Analysis: European naphtha shipments sail around Africa to delay arrival in Asia

Singapore — The supply length in the Asian naphtha market has led some European arbitrage shipments to detour on a longer voyage around the African continent instead of going through the Suez Canal so as to land the cargo in the Far East petrochemical hub farther out when the demand-supply balance improves, industry sources said.

The LR2 tanker, STI Spiga, laden with European naphtha was spotted heading to Japan on a route going around the Cape of Good Hope, according to cFlow, Platts trade-flow software.

The vessel was chartered by Novatek at $1.7 million for an Ust Luga to Japan voyage, and loaded over Nov. 5, shipping sources said.

As a result of the voyage going around Africa, the journey will be extended by about two weeks, market sources said. Typically, an Ust Luga to North Asia voyage takes 45 days via the Suez Canal.

STI Spiga's estimated arrival in Singapore is Dec. 23, which suggests that it will arrive in time for H1 January delivery into the North Asian market, Platts cFlow showed.

This would place the cargo at a time when Asian end-users are expected to be building inventory going into the new financial year, and demand is slated to recover as crackers return from maintenance amid expanded capacities, market sources said.

Platts cFlow also showed that other LR2 tankers had sailed around the Cape of Good Hope from Ust Luga -- the SKS Demini, chartered by Novatek for an East-bound voyage which loaded on Oct. 5 and enroute to reach Singapore on Dec. 19, and the Sabetta, which sailed from Ust Luga on Sep. 21 and reached Taiwan on Dec. 2.

Naphtha exported from Ust Luga are either heavy or light grades, market sources said.

For January to October, there were 37 Asia-bound naphtha cargoes -- amounting to 19.28 million mt -- exported from the Ust Luga Terminal, of which five did not go via the Suez Canal, according to shipping fixtures and Kpler data. Of those five ships, one arrived in the Far East in June, two arrived in early November, and the next two are described above.

The LR2 tanker, SKS Delta, is another delayed shipment. The vessel loaded an Ust Luga naphtha cargo on Oct. 20, but remained in Atlantic waters near the deviation point so that it can either choose to go south around the African continent, or east into the Mediterranean, since early-November, Platts cFlow showed.

"Nobody is taking the heavy [naphtha grades], so naturally you would want to extend the voyage because it is hard to find a buyer," an Asian naphtha end-user source said.

LIGHT NAPHTHA SUPPORTED BY PETROCHEMICALS

On the lighter end of the naphtha complex, high paraffin grades are in demand by olefin producers due to positive margins for both ethylene and propylene. However, some cracker outages in North Asia have recently weighed on the Asian market.

Europe was set to support petrochemical-grade naphtha through December due to firm olefin contract prices, along with healthy demand and tight supply in downstream petrochemical markets supporting margins.

The December ethylene CP stood at $950/mt, $24/mt higher month on month, while the December CP for propylene was at $880/mt, up $18/mt month on month.

Platts NWE spot cracker margin closed at $522.31/mt on Dec. 1, its highest since April 21, Platts data showed.

Although LPG is frequently used as an alternative petrochemical feedstock, naphtha remains the feedstock of choice given Northwest Europe's lower temperatures.

BEARISH HEAVY NAPHTHA

However, the demand profile for heavy naphtha grades was different due to a weak gasoline market, which has resulted in an oversupply of these grades in Europe and Asia.

A glance at the daily floating storage showed that 92,000 mt of naphtha remained on water in Europe for the past seven days, the highest since June 1, and a huge uptick from none in the previous week.

The increase was also marked in Asia, where 180,000 mt was in floating storage on Dec. 1, up from 163,000 mt the week before.

Asian demand for heavier naphtha grades was weak, and splitters were operating at around 70% of capacity due to poor aromatics margins, which led to a long supply for heavy full range naphtha.

Poor domestic gasoline demand in Russia due to lockdown restrictions could have served as a motivation for heavy naphtha holders to send these grades to the Far East as the best alternative, while demand in NWE remained poor.

Naphtha volumes out of the Black Sea and the Mediterranean more frequently flow to Asia compared with the Baltics, on more favorable economics, and was estimated at 10.26 megatonnes against 2.49 megatonnes for 2020 to-date, respectively, Kpler data showed.

Choosing a longer route around the African continent also reflects a combination of savings from the Suez Canal passage -- a fee of around $330,000 for a laden LR2 -- and better economics from the later delivery timing due to the contango market structure given the oversupply of cargoes.

"Those [naphtha] cargoes are probably stalling [to wait] for the arbitrage [economics] to improve," another source said.