Commodities 2022: Naphtha to remain key steam cracker feedstock on pricier LPG

Asia is bracing for consistently costlier LPG versus naphtha, which may be entrenched as the major feedstock for steam crackers in 2022, extending the trend seen for some nine months in 2021, as propane demand rises further on growth in China's propane dehydrogenation sector, traders and analysts said.

End-users worry if US LPG supply, while growing, is sufficiently steady to meet rising Asian demand, even as Europe and Latin America increasingly compete for US cargoes, while Middle East flows are stable to slightly higher and Iranian shipments could fill some Chinese demand.

"I think US gas production is the biggest uncertainty to the general balance. At the moment, we are seeing forecasts of not very high production to be expected in 2022," a Chinese trader said.

US propane production from gas plants is expected to average about 120,000 b/d higher on the year at 1.82 million b/d in 2022, according to S&P Global Platts Analytics.

Assuming typical seasonal domestic demand and exports near 1.25 million b/d, forward cover is expected to hold above 20 days through late February, Manish Sejwal, analyst with Platts Analytics, said. Barring a significant storm in 2022, US propane supplies should be adequate for demand through the rest of winter.

"I believe supply of LPG and naphtha from the US will go up, but lag behind global demand," a Northeast Asian end-user said.

Some traders said Chinese propane demand for PDH plants would be 4 million mt more in 2022 than the 25 million mt for 2021.

China would continue its drive towards self-sufficiency in propylene derivatives, aiming to bring online 3.7 million mt of new PDH capacity in 2022, up by around 1.2 million mt year on year, Sejwal said.

New PDH plants could consume 4.45 million mt of propane when running at 100% capacity, with most of this capacity scheduled to come online in first-half 2022.

US arbitrage

While Asia continues to add naphtha-based cracking capacity, the rise in PDH capacity is outpacing ethylene capacity growth, Sejwal said.

With global propylene markets slightly tighter than ethylene and reliance of single-feed on-purpose propylene plants, maximizing LPG as feedstock for olefin production would become increasingly difficult for steam cracker operators, and PDH plants at times would become important for propane-price discovery, Sejwal added.

An Asian trader said that for the past few years, LPG prices have been swinging depending on arbitrage from the west, especially the US.

"However, due to various reasons, US LPG inventory has been low for past 1-1.5 years. This resulted in high LPG prices in the US, resulting in lower arbitrage flows," the trader said, which manifested in a strong FEI propane-MOPJ naphtha spread.

"However, US production of natural gas and liquids is now stabilizing and the US is able to increase its export. Middle East LPG production has also increased," he added.

"This has resulted in shrinking FEI-MOPJ, which is now negative. If US production continues to stabilize, I think US export will increase further, which might result in weaker LPG prices next year," the trader said.

"On the other hand, gasoline could strengthen next year once the COVID situation stabilizes further, which could be bullish for naphtha," he said, countering concerns from some end-users that gasoline demand has been hit by limited mobility during the pandemic, leading to poor gasoline margins.

Naphtha is typically used as blending component for low octane gasoline. Both light and heavier grades are lower than required to fit gasoline specifications in octane numbers, incurring octane-enhancement costs during blending. Heavy grades incur catalytic reforming costs, while light grades are commonly mixed with octane boosters.

The Singapore reforming spread -- the difference between Singapore 92 RON gasoline and Singapore naphtha derivatives -- swung to a 10-month low Nov. 30, as naphtha gains outpaced that of gasoline, driven by the strength in Asian naphtha amid tight supply and strong cracker feedstock demand.

The reforming spread narrowed $2.03/b week on week to $4.50/b at the Nov. 30 Asian close, Platts data showed.

As gasoline was weak against naphtha, the thinner spread meant that it was less profitable for gasoline blenders to use naphtha as blending component.

However, the margin recovered during the week ended Dec. 7, jumping 79% week on week to $8.05/b, pushing the spread to a five-week high.

In 2021, the reforming spread averaged $7.91/b, 44.95% higher than $5.46/b in 2020.

Typically, LPG should be around 90% the price of naphtha for it to be a viable alternative feedstock, depending on cracker configuration and the strength of olefins versus aromatics.

Residential demand

Traders said China's 2021 residential demand grew from the 2020 bottom and will be largely stable, or increase slightly, next year. Some areas will use more LPG, while others will replace LPG with pipeline gas, or natural gas.

Sejwal said China's LPG demand from its residential/commercial sector would continue to decline from its 2017 peak. In 2019, this sector's demand fell by more than 3 million mt on steady displacement by natural gas. The establishment of Pipe China and decarbonization goals are likely to hasten this decline, however, the pandemic may have slowed the pace of displacement.

Platts Analytics estimates China's 2022 residential/commercial demand could range between 25 million mt and 26 million mt.

In India, the residential/commercial sector is expected to show steady growth, driven by subsidy support and limited availability of piped gas due to infrastructure constraints, which may hoist it above China as the largest residential/commercial LPG market globally, though significant demand barriers persist.

Low refill uptake by beneficiaries of the Pradhan Mantri Ujjwala Yojana scheme due to high costs, as well as behavioral and cultural issues, are impeding demand growth and Platts Analytics estimates India's LPG demand to rise 1.93% to slightly above 28 million mt in 2022.