FEATURE: Asia's steam crackers to use less naphtha Jul-Aug on feedstock switch to LPG

Singapore — A multi-month low LPG versus naphtha price spread has Asia's naphtha-fed steam cracker operators planning an increase in LPG feedstock over July and August, industry sources said July 9.

While Asian steam crackers are using more LPG from July, they may not have maximized usage of the cheaper feedstock yet. Not all steam crackers are flexible in switching feedstock, or may need a very wide discount for LPG against naphtha for it to be economically viable, naphtha end-users added.

"The switched volume is still limited, just some South Korean and some Japanese crackers," a naphtha end-user in North Asia said.

"Asian crackers can consume more than 300,000 mt per month of LPG, so it is not very small, and can have a big impact," a South Korean end-user said.

Industry sources said the maximum LPG feedstock demand from Asian crackers can be up to 600,000 mt/month.

The Far East Index propane swap spread against the Mean of Platts Japan naphtha swap narrowed $3.50/mt day on day to minus $48.25/mt at the July 8 Asian close. Steam crackers typically begin utilizing more LPG when it is $40-$50/mt cheaper than naphtha, sources said.

LIMITED LPG PURCHASES SO FAR

South Korean naphtha end-users emerged in June to purchase LPG feedstock due to the wide discount to naphtha.

There was also interest from Japanese steam cracker operators to purchase spot butane for July, sources said. Mitsubishi Chemical was seeking butane for July delivery in the last week of June, but has since gone quiet, traders said.

Taiwan's Formosa Petrochemical Corp. emerged after a long absence to purchase 22,000 mt of butane for second-half of July delivery. But spot LPG demand from Formosa was expected to pause due to planned maintenance from mid-August to end-September, S&P Global Platts earlier reported.

Thailand's PTTGC may only purchase spot LPG in the fourth quarter, in line with the startup of its new steam cracker in H2 October, a company source said. For July, PTTGC raised its usage of LPG as steam cracker feedstock, and excess LPG from its refinery is limited due to domestic requirements, the source said.

"We are still reviewing the market situation and considering if there is any need to purchase additional spot LPG from the market, right now we have no immediate plans," the company source said.

VARIED CRACKER OPTIMIZATIONS

Two main things to consider for steam crackers currently are: poor aromatics margins should cap the rise in naphtha prices, however, ethylene is performing better than aromatics -- which is good for LPG usage as LPG yields more ethylene and propylene on cracking than naphtha, whereas using naphtha yields more aromatics such as benzene, toluene and xylenes, said Manish Sejwal, analyst, Light Ends - NGL at Platts Analytics.

"From July, we will crack more LPG, the situation is the same for all South Korean end-users, but I am not sure if they will crack maximum LPG or not," said a South Korean naphtha end-user, adding that the end-user is using only a third of the maximum possible LPG feedstock for July.

"Every cracker has different economics of LPG use instead of naphtha, and need to consider all petrochemical product values, not only ethylene and propylene but also butadiene and benzene," the source said.

South Korean and Taiwanese crackers can use up to 20% LPG and Japanese crackers around 6%-7%, with a preference for butane, Sejawal said.

The spread between CFR Northeast Asia ethylene and CFR Japan naphtha physical was $401.50/mt at the July 8 Asian close, down by $42/mt on the day. This is above the typical breakeven spread of $350/mt for non-integrated producers, Platts data showed.

NAPHTHA REMAINS TIGHT

Asian naphtha buyers were hoping for relief from the tight supply situation, however, with steam crackers running at high levels due to healthy olefin margins and no increase in exports from the Middle East, India or the West of Suez, overall sentiment remains firm, sources said.

Some respite may be seen as LPG replaces some naphtha feedstock requirements, sources noted.

Reflecting the tight naphtha market, the CFR Japan naphtha physical crack against front-month ICE Brent crude futures reached $79.50/mt at July 6's Asian close -- a near 6-month high -- and was last assessed at $75.625/mt at July 8's Asian close, Platts data showed.

LPG DEMAND SLUMP

LPG demand was slow in June, as key buyers India and Indonesia had inventory pressure from heavy stockpiling pre-coronavirus lockdowns. Although Indonesia's Pertamina emerged to seek two separate mixed cargoes for delivery over July-August, market participants expect India's demand to resume only in September.

The onset of summer diminished demand for LPG as a heating fuel, and coronavirus movement restrictions caused weak demand for LPG as autogas in South Korea.

Moreover, China's PDH plants reduced their reliance on LPG from the Middle East since exemptions on import tariffs for US LPG were issued since March.

China's US LPG imports soared to 733,385 mt in May, comprising 629,822 mt of propane and 103,563 mt of butane, up from zero a year earlier, General Administration of Customs data showed on June 26.