North Asian steam crackers rebuff LPG for naphtha in hunt for best yields

Double-digit discounts of propane to naphtha have not lured North Asian petrochemical makers into switching to LPG as an alternate cracker feedstock due to low prices for ethylene, the main yield from cracking LPG, traders said June 17.

While regional steam crackers are sticking with naphtha as key feedstock in search of valuable gasoline-blending components during summer, traders said run rates were being kept low to minimize operating losses.

While the week-long strike by truck drivers in South Korea -- which slashed operating rates to an average 76% of capacity and limited polymer shipments -- ended June 14, traders said crackers could not immediately boost output as olefin margins remained in the red.

"I'm trying to figure out how other crackers would react; we cannot ramp up production right after the strike," one trader said. "It might take time. Many crackers are lowering rates to reduce losses," he said, adding that negative margins would persist for some time.

Amid the bearish margins, even discounts as steep as $110.75/mt for FEI propane swaps against Mean of Platts Japan naphtha touched May 17 were deemed insufficient for crackers to turn to LPG as feedstock.

The discount has since narrowed to $52.75/mt June 16, S&P Global Commodity Insights data showed. While this was steeper than the $50/mt threshold that normally prompts crackers to make the switch, crackers are avoiding LPG as it yields more low-priced olefins such as ethylene.

The physical spread between CFR North Asia propane 30-60 days and C+F Japan naphtha has largely been negative since the start of 2022 and was assessed at a $42.25/mt discount at the Asian close June 16, S&P Global data showed

The ethylene production yield from naphtha is 0.23, while LPG cracking increases it to 0.36-0.4, market sources said. The propylene production yield from naphtha is 0.13 versus 0.18-0.2 from cracking LPG.

The spread between CFR Northeast Asia ethylene and CFR Japan naphtha physical was $211.25/mt at the Asian close June 16, down $7.625/mt on the day, and below the typical breakeven spread for non-integrated producers of $350/mt and integrated producers of $250/mt, S&P Global data showed.

Gasoline blending demand

In comparison, pyrolysis gasoline -- a benzene-rich byproduct from naphtha steam cracking -- was in demand amid an octane shortage, making PG a valuable component in the petrochemical complex.

PG can be blended with other hydrocarbons as a gasoline additive or distilled in the BTX process -- mixtures of benzene, toluene and xylene isomers -- and is generally used as a gasoline-blending mixture due to its high octane number.

Due to this strength, the BTX-naphtha spread touched a record high $588.22/mt June 8 and averaged at $502.71/mt over H1 June, up from $267.85/mt in May, S&P Global data showed.

"PG, the feedstock of BTX are quite strong components in the petchem complex due to the octane shortage and naphtha can make more PG, so no one wants to buy more LPG at this level [of around a $70/mt discount to naphtha]," a trade source said.

"Moreover, crackers are lowering their run rates due to poor margins, which leads to more shortage of PG. So, alternative LPG demand would be weak during summer, unless end-users have already hedged at more discounts," he added.

E1 Corp., which buys LPG for South Korean petrochemical makers, last bought via tender late May 23,000 mt/month of butane for July-September delivery at a $55/mt discount to MOPJ naphtha. Trade sources said the cargoes were bought for major petrochemical maker YNCC for delivery at Yosu.

"After that, cracking economics have changed a lot," the source said.

Other South Korean crackers have not been seen buying LPG since, while E1 June 15 bought a 23,000 mt spot propane cargo for H2 July delivery from Glencore.

Low runs blunt demand

While Taiwan's Formosa Petrochemical Corp. bought via tender late-May tender a 44,000 mt evenly split propane-butane cargo for end-June delivery at a discount in the high $70s/mt to MOPJ naphtha, sources said the butane could be for refinery fuel use and the mixed cargo was for residential use. Following that, Formosa bought via tender June 16 a 33,000 mt propane-11,000 mt butane cargo for H2 July delivery at a discount in the low $50s/mt to July MOPJ naphtha, which a source said was also for household use.

"We bought not for cracking this time," a market source said. "We need more discount to switch to LPG, but I feel the main reason is lower run rates of crackers," he said.

Overall demand for cracker feedstock was hit last week when South Korea's naphtha-fed steam crackers lowered operation rates to prevent inventory buildup as a strike by truck drivers choked polymer product outflows. Their operating rates were originally planned at 84% for June, but dropped to 81% June 7 and 76% June 14, market sources said.

While some crackers have begun to recover operations as the truck drivers resume working, it will take time to ramp up polymer facilities, sources said.

Reflecting the weak naphtha demand, the cash differential for spot paraffinic naphtha was assessed at minus $10.25/mt June 16, down $1.75/mt week on week against benchmark Mean of Platts Japan naphtha physical on a CFR Japan basis.

The pause in petrochemical-sector LPG demand sent front-cycle CFR North Asia propane prices to a 15-month low at $733/mt June 15 before rebounding to $756.50/mt June 16, S&P Global data showed.