Asia's petrochemical makers are shifting, or considering to use propane as alternate steam cracker feedstock amid the deepening discount of propane to naphtha, as LPG is pressured by ample supply and a lull in Chinese and Indian demand, traders said Jan. 21.
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South Korean crackers have started seeking propane, traders said, even when the discount of February FEI propane swap to the Mean of Platts Japan naphtha was around $26.25-$26.50/mt over Jan. 17-18, before widening to $36/mt Jan. 20. This is the deepest discount since June 8, 2021, at $41.50/mt, Platts data showed. In contrast, the difference between FEI propane and MOPJ naphtha was at a premium of $185/mt on Oct. 4 last year.
Traders said Asian cracker operators in recent years are likely to turn to LPG as alternate feedstock even if the discount of propane to naphtha is not as sharp as $50/mt, or when LPG is 90% or lower than naphtha, which has been the typical level deemed economically viable for the switch.
On the physical front, the spread between CFR North Asia propane versus CFR Japan naphtha narrowed $54/mt week on week to minus $36/mt at the Jan. 20 Asian close, Platts data showed. The spread is typically tracked closely by end-users as LPG produces more olefins than naphtha feedstock, sources said.
Naphtha bearish on weak olefins margins
The Asian naphtha market saw demand-side weakness Jan. 20 on narrowing olefins margins.
Unprofitable olefins margins weighed on the naphtha complex and dampened its demand. The CFR Northeast Asia ethylene and C+F Japan naphtha spread was well below the typical breakeven level of $300-$350/mt for non-integrated producers, pushing steam crackers to reduce operating rates. At least one Asian steam cracker cut rates in January, Platts reported earlier.
The ethylene-naphtha spread narrowed $66/mt week on week to $140.50/mt at the Asian close Jan. 20, Platts data showed.
However, the benchmark naphtha C+F Japan cargo was assessed at $784.50/mt at the Asian close Jan. 20, up $16/mt on the week, Platts data showed, taking a cue from rising Brent futures.
Front month ICE Brent crude futures rose $3.20/b over the same period to $87.83/mt at the Asian close Jan. 20.
Discount threshold changing
The propane-naphtha discount considered viable for the switch could lately be as low as $20-$30/mt, traders said, in view of the trend in 2021 when LPG had been costlier than naphtha for at least nine months, keeping naphtha the major staple for Asian crackers.
The discount threshold for the switch to LPG has also changed due to long periods of poor aromatics margins, especially in view of high premiums of light naphtha, traders said.
"Overall margins had been bad for H2 2021 because of escalating feedstock prices due to strong crude oil, especially from the Persian Gulf where usual olefin crackers do not have downstream units, so they are sold at low prices," one trader said, adding that prices of olefin products "were not that good because of poor downstream prices in China".
South Korean trader E1 Corp., which normally buys LPG for petrochemical makers, has issued a tender for LG Chem, seeking 23,000 mt of propane for Feb. 19-23 delivery to Daesan, which was due to be awarded on Jan. 19, traders said.
Other North Asian cracker operators such as Taiwan's Formosa Petrochemical, normally a key first mover to capitalize on cheaper LPG as feedstock, is "likely" to make the switch, a source said.
South Korea's Lotte Chemical is sensing that the discount could sharpen further. A source said: "This level seems good, but the lower trend would make us wait for the movement."
"I'm not sure how much the discount would go further, but considering winter season (is ending)... I expect prices to go down without heating demand," he added.
China, India demand to recover from March
Asian LPG prices have been on a downtrend in recent weeks as North Asian demand for winter heating ebbed, Chinese demand for propane dehydrogenation plants, along with the manufacturing sector, pause ahead and during Lunar New Year from end-January to early February, while Indian demand is only expected to pick up around March.
Front-cycle H2 February CFR North Asia propane was assessed Jan. 19 at $751.5/mt, down $5.50/mt on the day, the lowest since Dec. 20, 2021, when it was at $750.50/mt, Platts data showed.
On Jan. 20, H2 February CFR North Asia propane inched up $1/mt on the day to $$572.50/mt as trading activity perked up. Platts had assessed H2 February CFR North Asia butane $9/mt below propane Jan. 20.
If the LPG downtrend persisted, it could momentarily firm its position as the alternative cracker feedstock, potentially dampening naphtha demand.
But once China returns from the long holiday and Indian spot demand recovers from March, Asia may see a resumption of strong LPG prices; as regional demand extends its projected growth and competes with rising consumption in Europe and Latin America for US cargoes, traders said.