Asia naphtha set for slightly stronger year; cleaner gasoline specs eyed

Asia's gasoline market will be supported by continued buying in the Middle East and growing demand in South Asia but projections of heavy Chinese exports may put a ceiling on the uptrend, sources said.

Market participants will also eye the planned shift to tighter gasoline specifications in Malaysia and Indonesia this year, and whether they will go ahead as planned.

Asian gasoline demand is expected to be firm on strong demand growth in Pakistan, India and Sri Lanka. Additionally, the Middle East is poised to continue pulling barrels in from the East and West of Suez through the first quarter due to a partial shutdown at Saudi Aramco's 550,000 b/d Ras Tanura refinery while the UAE Takreer's fire-damaged residual fluid catalytic cracker at its 840,000 b/d Ruwais refinery remains under repair.

But the upside may be offset by expected higher exports from China.

China raised its first round gasoline export quota for 2018 by 74% year on year to 6.55 million mt under the general trade route. With sharply higher crude oil import quotas granted to independent refiners this year, higher refinery runs and gasoline production is to be expected, amid a slowdown in domestic demand growth.

However, uncertainty remains over if and when China will implement a consumption tax on mixed aromatics, which will in turn curb gasoline production. With the proposed tax still not implemented yet, traders are speculating on a date in mid-2018 or even in 2019.

Within Southeast Asia, Indonesia's planned shift to Euro 4 specifications from Euro 2, and Malaysia's proposed rollout of Euro 4M from Euro 2M, both in October 2018, are met with skepticism from the market. Many felt that the changes would be delayed to 2019-2020 at best, and therefore would have little impact on the market.

Vietnam's replacement of conventional 92 RON gasoline with E5 92 RON gasohol -- a blend of 5% ethanol and 95% gasoline -- since January 1 roused little interest with sources saying there will be limited impact on the market.

NAPHTHA: CAUTIOUS OPTIMISM BUT HEAVY CRACKER TURNAROUND WEIGHS

The Asian naphtha market is expected to be underpinned by strong demand amid projections that petrochemical margins would be lower but still healthy.

New reformers and a new steam cracker coming online would also spur some demand from China, but a heavy steam cracker turnaround schedule may cap any big upside, sources said.

Market participants expect petrochemical margins to dip in 2018 on an expected influx of polyethylene from the US with the startup of new units from H2 2018, putting some downward pressure on PE and ethylene. But with the current ethylene/naphtha spread still wide, margins would still be considered healthy even with slightly lower ethylene prices, sources said.

China's naphtha demand will be closely watched as new reformers and a steam cracker in independent and state-owned refineries are set to commence operations, bolstering demand for both heavy and light naphtha.

CNOOC and Shell Petrochemicals Company Limited, or CSPC, plans to start up a new naphtha-fed steam cracker with an ethylene production capacity of 1.2 million mt/year in Huizhou around end-2018. This will see the company either buy naphtha from the domestic market or boost imports by one to two more LR2 cargoes every month after the cracker becomes fully operational, a source with knowledge of the matter said.

Lower exports from Aramco due to Petro Rabigh's new aromatics project at the 400,000 b/d refinery will also lend greater upside to market fundamentals.

The unit, which can process more than 2.7 million mt/year of naphtha from the refinery and Aramco, is targeted for startup in Q1 2018.

However, a heavier Asian steam cracker turnaround schedule will weigh on naphtha demand this year. Some 7.26 million mt/year of ethylene capacity will be idled in top three naphtha importers Japan, South Korea and Taiwan in 2018, compared with 4.06 million mt/year last year.

A swing factor is whether naphtha remains the favored petrochemical feedstock over LPG. Some expect this to be so, amid anticipation of curtailed LPG production from the Middle East as OPEC-led crude oil production cuts remain in place until end-2018. However, butane prices have recently come under naphtha, leading petrochemical producers to pick up some butane.

LPG: PICKUP IN SPOT ACTIVITY; MIDEAST SUPPLY STAYS LOW

Asia's LPG market may see more spot activity emerge, as several major LPG importers in Northeast Asia held back from securing incremental term supplies for 2018 on expectations that prices will be lower in early 2018 due to the steep backwardation, traders said. As such, most importers have rolled over 2017 term volumes.

Market participants were also gravitating towards CFR contracts instead of FOB contracts, on concerns of getting hit by higher freight rates this year.

Meanwhile, with the extension of the OPEC-led cuts translating to lower associated gas production, exports from the Middle East are expected to stay at similar low levels from 2017.

Asian LPG demand will continue to grow as new propane dehydrogenation plants come online in China, and India's LPG consumption is projected to grow by 8%-10% this year as the country pushes for more LPG use over kerosene, sources said.

China's 2018 LPG imports are expected to climb further from the 18 million mt projected for 2017. Oriental Energy's third 660,000 mt/year PDH plant in Hebei province is expected to come online over 2018-19, sources said.

Oriental is raising its 2018 LPG imports to 10 parcels from eight last year, a source with knowledge of the matter said. Each cargo is around 44,000 mt.

South Korea's Lotte Chemical, LG Chem and Hanwha Total Petrochemical have planned steam cracker expansions that will only use LPG as feedstock.

Among them, Lotte Chemical is expanding its cracker capacity by 200,000 mt/year to 2 million mt/year of ethylene from December 2018. This translates to an additional 500,000 mt/year of LPG requirement. The company plans to start securing feedstock for the expansion in Q4.