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Dark clouds over Asian naphtha market unlikely to clear amid China's economic struggles

Highlights

Weak Chinese economy weighing on petrochemical sector

Plastics demand takes hit with China property sector decline

Asia's naphtha-fed steam cracker operations remain low

  • Author
  • Karen Ng    Analyst Oceana Zhou
  • Editor
  • Jim Levesque
  • Commodity
  • Oil Petrochemicals Shipping

Asia's naphtha market is feeling the pinch from China's weak economic and industrial growth and the outlook is unlikely to improve anytime soon as demand remains under pressure because of Beijing's zero COVID-19 policy and slowing construction activity.

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Hit by feeble demand for plastics in China, analysts are of the view the sector will likely remain weak until demand from Asia's biggest economy starts to pick up, which may not happen until early next year.

"China's economy has been affected badly by the zero COVID-19 policy and this has caused demand for petrochemicals to fall a lot," a source with a Chinese petrochemical company said.

The key Japan naphtha crack versus Dubai crude is expected to fall to minus $21/b in the fourth quarter, from minus $20/b in Q3, said Aaron Cheong, senior analyst at Platts Analytics. Platts Analytics expects the crack to rise to minus $16/b in Q1 2023.

"Polymer prices have fallen as if there is no tomorrow," a Southeast Asia-based source said. "Unless China's demand comes back again due to a change in its COVID-19 policy, we are stuck."

The source noted "naphtha prices have been falling, yet we still cannot make money. This is purely because demand is not there."

Petrochemical margins

Key petrochemical price spreads to naphtha have declined, with the spread between CFR Northeast Asia ethylene and CFR Japan naphtha physical hovering below the usual breakeven spread for non-integrated producers of $350/mt since April 29.

It was last assessed at $131.25/mt at the Aug. 23 Asian close, down by $27.50/mt week on week, S&P Global data showed.

Platts physical C+F Japan naphtha cargo assessments averaged $785.11/mt in July, down from $822.89/mt in June, S&P Global data showed. Naphtha prices have been on a downtrend since March after hitting a high of $1,158.63/mt on March 7.

"There is a lot more downside than upside for Asia naphtha as we move into the end of the year," Cheong said. "Bearish petrochemical margins will continue to limit cracker run rates, thereby capping any significant upside to Asia naphtha."

In line with poor olefin production margins, Chinese steam crackers have cut operating rates to reduce their losses and were running at about 75%-80% of their capacity in August, according to data tracked by S&P Global. Cracker operating rates were above 80% in July.

The International Energy Agency, in its monthly report Aug. 11, forecast a fall of 70,000 b/d in Asian naphtha demand in 2022 because of uneven Chinese polymer demand, weak margins and some issues at petrochemical plants that have created hurdles for the region's producers.

"Demand will not come back this year because prices of plastics are not good at this moment and the cracker ratio will not come up from 80%," a North Asia-based source said.

Chinese property slowdown

"The main problem is the impact of the property sector in China," the Southeast Asia-based source said. "There are a lot of property buyers and developers who have been defaulting on their loans, so the properties are not completed, and this has led to a big fall in demand for plastics."

A Beijing-based trader added: "Petrochemical product demand is very bad in China, with product prices staying at levels equal to crude price at $40s/b, while demand for the middle distillates and residuals, like bunker fuel oil or asphalt, are better than petrochemicals or light ends like naphtha."

Chemical products are widely used for property renovation and construction, but demand from the sector had slumped due to cash flow woes, trade sources added.

Tens of thousands of people are refusing to pay mortgages for uncompleted apartments, slowing private residential construction in the country.

"The problem is unlikely to be solved in the short term while the government has announced not to implement strong simulators to boost the economy," a Beijing-based analyst said. "I cannot see a strong rebound in demand."

China's new home construction launches in July were down 45% year on year and 35% month on month despite an already low base in July 2021, according to the National Bureau of Statistics. That meant new home construction launches over the January-July period were down 36% year on year.

The country's new home sales value slumped 28.1% year on year in July. It was down 20.7% year on year in June.