Russia-Ukraine war driving up feedstock costs triggers petrochemical crisis in Asia

Asia's petrochemical producers are scrambling to cut operating rates and switch to alternative feedstock to cope with over decade-high naphtha costs aggravated by volatile crude prices sparked by the Russia-Ukraine war, which have sent margins teetering near negative value.

Naphtha-fed steam crackers in Asia had started reducing runs since late-2021 to manage meagre margins. Some operators slashed those rates to 70% in March, as the geopolitical turmoil took its toll, sources said, and the prolonged strain led to production line cuts further downstream.

"Feedstock prices are above the level we can bear," a North Asian petrochemical maker said.

Benchmark naphtha C+F Japan cargo climbed $1,132.375/mt March 7, and was last higher on July 16, 2008, at $1,181.25/mt, data from S&P Global Commodity Insights showed.

At the March 11 Asian close, the benchmark naphtha C+F Japan cargo was assessed at $1,019.625/mt and has remained above the $1,000/mt mark since March 2, S&P Global data showed.

Before Russia's invasion of Ukraine, the January 2022 average was $769.857/mt.

Falling naphtha demand from regional crackers could not contain the relentless price rally, as Europe and Asia saw limited Russian cargoes.

The current second half April delivery cycle lacked buying interest from steam crackers, with some heard seeking to offload naphtha.

Profitability was hit by unhealthy ethylene-naphtha margins, as downstream production lagged volatile upswings in the upstream sector.

The key CFR Northeast Asia ethylene and C+F Japan naphtha spread averaged $220.22/mt over March 1-11, down from February's average of $315.73/mt, S&P Global data showed.

This was below the breakeven point, or BEP, for integrated producers around $250/mt, while non-integrated producers typically see a BEP of $300-$350/mt, sources said.

"The petrochemical markets are oversupplied for derivatives of C2 and C3. But recent run cuts are driven by soaring feedstock," the North Asian source said.

"If producers are integrated, they could manage to make money even if it is small," he said, adding they are already facing poor margins, so even if the crisis settles, low margins will persist.

Downstream cuts

Ethylene demand is likely to remain pressured by the naphtha price hikes, as weak derivative margins prompt several buyers to cut operations and reduce purchases. This led some crackers to lower operations for derivative production such as polyethylene (PE) and polypropylene (PP) which supports lower cracker run rates by reducing ethylene consumption, a source said.

"Northeast Asian PE and PP[production] should be shut down. They cannot make money for a couple of months for sure," a source at an Asian steam cracker said.

A China-based trader meanwhile said, "We don't see any other way out. PE makes up the bulk of downstream production, so makes sense for crackers to cut PE rates and reduce ethylene production."

Major Chinese producer Sinopec announced March 8, it would cut operating rates across several of its crackers, along with shutdowns or reduced runs at PE and PP facilities.

Zhejiang Rongsheng is expected to lower runs for its monoethylene glycol (MEG) to reduce ethylene consumption at crackers.

Lotte Chemical plans to shut its No. 1 MEG line in Daesan March 20.

Major South Korean producer LG Chem plans to shut PE lines, while running its MEG, styrene monomer, and vinyl chloride monomer lines.

"We had no other choice, as 80% is the lowest we can reduce cracker run rates to without risking unstable operations," said an LG Chem source.

Supply of ethylene will likely get tighter as more and more crackers look at cutting operating rates, a Singapore-based trader said.

"Buyers either have to absorb higher costs, or cut operating rates for downstream products, as naphtha is too volatile."

Before Russia's invasion of Ukraine on Feb. 24, "we were near BEP, when combined with polymer," the North Asian source said, adding margins were slightly positive, but long periods of expensive feedstock "would prompt large run cuts or maintenance."

Crackers must keep operating

Trade sources said with the discount of FEI propane swaps to the Mean of Platts Japan naphtha around the deepest in recent years at $178.25/mt March 9, North Asian crackers are expected to continue seeking propane and butane for H2 April deliveries and beyond, as alternate feedstock, even after several South Korean crackers bought ample LPG for April.

Front-cycle CFR North Asia propane averaged $767.07/mt in January, rising to $824.53/mt in February and to $978.06/mt over March 1-10, S&P Global data showed.

Front-cycle CFR North Asia butane averaged $758.21/mt in January, increasing to $837.75/mt in February and to $989.31/mt over March 1-10, S&P Global data showed.

E1 Corp. was regularly buying LPG for South Korean petrochemical makers, though Taiwan's Formosa Petrochemical, which plans to lower runs at three naphtha-fed steam crackers, withdrew its LPG import tender for H2 April, a source said.

The North Asian source said it was necessary to switch to LPG to continue running crackers, albeit at lower rates.

"The basic unit of feedstock or utility might deteriorate, so you cannot lower it that much. If we put limited feedstock into crackers, we would prefer LPG than naphtha," he said.

"It could be expressed as reducing loss by using LPG," even if outright LPG prices are high, though not as strong as naphtha.

Estimated operating rates at Asian naphtha-fed steam crackers:

Data from: Market sources