Analysis: April-loading Europe to Asia naphtha arbitrage volumes fall as East-West spread narrows

Singapore — Europe to Asia naphtha arbitrage volumes have thinned in April due to poor arbitrage economics as the naphtha complex braces for more pressure to weigh on the petrochemical feedstock grades in May and LPG-maximized utilization rates add to bearish sentiment.

April-loading fixtures to date amount to just 1.16 million mt, even as chartering activity has begun for the May-loading program. Comparatively, March-loading fixtures for naphtha arbitrage cargoes totaled 1.237 million mt, despite the unprecedented disruption in the Suez Canal, data from market sources and S&P Global Platts cFlow showed.

The front month May East-West spread -- the premium of the CFR Japan naphtha cargo swap over the CIF NWE equivalent -- was assessed at $11.75/mt April 21, down 25 cents/mt from previous assessment and at the lowest level since Feb. 26. The spread has moved below the short-term 50-period moving average of $13.08/mt since the beginning of the week, and is well bellow the long-term 200-period moving average of $16.18/mt.

Lower naphtha supply into Northwest Europe in April has so far added to alleviation of the length seen in late March, due mainly to higher US naphtha cargo arrivals. However, increasing demand for naphtha blendstocks, coupled with higher demand for LPG cracking in both continents, has reduced interest in arbitrage flows East that are commonly comprised of cracker-suitable naphtha feedstocks.

Asia is currently undergoing its seasonal steam cracker maintenance period. Major naphtha buyer Lotte Chemical will shut its Daesan cracker over May-June, which can produce 1.1 million mt/year of ethylene, and Taiwan's Formosa plans to shut its No. 1 cracker over June-July, which can produce 700,000 mt/year of ethylene. This comes after unplanned shutdowns at Formosa's No. 1 cracker and all of PTT's five naphtha-fed steam crackers in the second decade of April.

Aside from these two major naphtha end-users, other crackers with planned turnarounds scheduled in the next few months include Idemitsu's at Chiba, Mitsubishi Chem's at Mizushima, Mitsui Chem's in Chiba and PCS' at Pulau Merbau 2, sources said.

This weighed on the C+F Japan naphtha physical crack against front-month ICE Brent crude futures, which fell $1.20/mt day on day to a four-month low of $72.975/mt April 21. It was last lower on Dec. 15, 2020 at $71.55/mt, Platts data showed.

LPG Competitive as feedstock

The use of LPG as an alternative feedstock for petrochemical makers has weighed on naphtha demand in both regions. While this was expected to improve the availability of arbitrage naphtha cargoes from Europe to Asia, there is ample supply of naphtha in Asia, which has squeezed the arbitrage spread.

Market participants said the recent drop in LPG prices had further weakened trading sentiment for naphtha. The Far East Index propane swap spread against the Mean of Platts Japan naphtha swap fell to minus $88/mt at the Asian close April 20 and was last assessed at minus $62.75/mt April 21, Platts data showed. Steam crackers typically switch to using more LPG as feedstock when the price is 90% or less that of naphtha, market sources said.

"A few days ago there was a crash in propane so there was a wide discount of FEI versus MOPJ, so LPG is more competitive to naphtha, and naphtha sellers would have to lower their prices; if not, crackers would run with more LPG," a naphtha end-user in Asia said.

Russia, one of the largest exporters to Northwest Europe, has so in April far floated 337,000 mt of naphtha to its domestic market, down from 506,000 mt in March and a multi-year low. However, higher anticipated demand for LPG cracking in May, coupled with a fall against naphtha prices, is likely to offset the tighter supply effect.

Moreover, downstream petrochemical markets continued to see healthy margins amid tight supply and robust demand. Platts spot cracker margin was assessed at $1,031.31/mt April and has averaged $915.19/mt to date in April, a near multi-year high.

Although European capacity for LPG cracking against naphtha is only around 30% of the total, naphtha will face strong competition in the cracking pool, in line with seasonal trends. Propane was increasingly losing value due to a loss of heating demand in NWE, while the inability of butane, due to its elevated RVP, to participate in the summer gasoline blending pool has also led to more favorable pricing against naphtha.

The front month May NWE CIF propane swap contract against the equivalent naphtha closed at a $101.25/mt discount April 21, and has averaged at a discount of $85.20/mt to date in April, widening from a $59/mt discount in March. On the other hand, butane CIF NWE large cargo was assessed at 88% against physical naphtha on the day and has averaged 90% to date in April, compared with 91.5% in March.

However, supply of LPG feedstocks into NWE and the Mediterranean were anticipated to be stronger in May, and seen picking up toward the end of April. A total of 492,000 mt of LPG was estimated to arrive to NWE in April from the Atlantic and USGC, up from 450,000 mt in March and the highest since October 2020 according to Kpler data.

The more accommodative LPG supply was widely anticipated by the market to lead to further price decline against naphtha. This will put pressure on European naphtha prices, which in turn will need to see support from the blending side in May to maintain current crack and cash differential levels. Although blending demand is anticipated to be accommodative in line with reopening economies, uncertainty regarding specific levels remains.

US propane and propylene stocks fell 74,000 barrels in the week to April 16, latest Energy Information Administration data showed.

Europe to Asia naphtha fixtures:

Key: NA=Naphtha, STS=Ship to Ship transfer, w=Worldscale, cnr=Charterer not reported, rnr=Rate not reported

Data from: Industry sources, S&P Global Platts cFlow