Singapore — Some Asian petrochemical makers are considering switching to LPG as a petrochemical feedstock as the discount to naphtha deepens, making LPG a more economically viable petrochemical feedstock, traders told S&P Global Platts this week.
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The front-month March Far East Index propane swap stood at $361/mt on Monday, while the March Mean of Platts Japan naphtha swap was assessed at $466.25/mt, putting the LPG discount to naphtha at $105.25/mt, the deepest in more than four months, Platts data showed.
Steam crackers in petrochemical plants can choose to maximize the use of either naphtha or LPG, depending on market economics. As demand for LPG for heating purposes decline in spring, more cargoes are available for use as petrochemical feedstock. Asian crackers can replace 8%-18% of naphtha as feedstock with LPG.
Crackers had cut back LPG as a petrochemical feedstock from December 2019, as LPG became costlier after its gains outpaced that of naphtha, placing it at a premium to the alternative petrochemical feedstock on December 23.
"Since last week , LPG is more economical [than naphtha to use as cracker feedstock] so we can buy LPG instead, but it won't make much of a difference to naphtha demand," a North Asian end-user said.
While the recent sharpening of the LPG discount to naphtha beyond the $50/mt threshold is expected to whet petrochemical makers' appetite, so far there has been no signs of a tender issued from Asian refiners, trade sources said. Taiwan's Formosa is a regular importer of spot LPG whenever the LPG to naphtha discount deepens.
However, market participants said that Formosa might be considering to buy LPG spot cargoes via tender later this week.
Formosa last bought via tender 44,000 mt of propane for January 1-15 delivery at a discount of around $40/mt to MOPJ naphtha assessments, DES Mailiao, in late November.
Naphtha trade sources said an increase in the usage of LPG would have a limited impact on naphtha, as the market has been strong given the tightness in supply for the current March delivery trading cycle into North Asia.
Market participants were more concerned about how demand would emerge following China's return to the market.
Steam crackers mulled ramping run rates in February due to improved petrochemical margins, however the outbreak of the coronavirus has disrupted China's petrochemical sector and could lead to a fall in demand, market sources said.
"Cracker margins look good compared with last month, but there is no clear direction on whether run rates will increase as the China market is not open yet. So, nobody knows how olefin prices may change," an end-user source said.