The Asian naphtha industry agreed Thursday that carbon disulfide, or CS2, levels in the light distillate have to be reported for cargoes originating from Sikka, India, and those from Western arbitrage flows into the region.
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Currently, clause 2.1 (C)(i) of the Open Specification Naphtha contract -- which requires that the first seller test and report on CS2 levels and provide that information upon nomination or as soon as it has been obtained -- only applies to cargoes for loading from Sikka. This discussion was carried out on the first day of the 23rd CFR Far East Open Spec Naphtha conference, which is being held in Singapore over April 24-25.
The annual meeting is attended by Asian naphtha suppliers, end-users and traders, and takes stock of and revisits issues pertinent to the Open Specification Naphtha Contract.
The consensus for reporting on CS2 levels came only after intense debate among Asian naphtha participants. A representative speaking on behalf of Japanese end-users initially put forward a proposal to include a maximum CS2 level of 2 ppm under contract specifications. This would mean that naphtha cargoes exceeding the 2 ppm limit would be unable to be nominated into the open spec naphtha chain.
While exact volumes are not clear, excluding cargoes high in CS2 levels would remove a large chunk of tradable naphtha volumes in the market. Platts data showed that for the first few months of this year, Asia has been receiving 1-1.5 million mt of Western arbitrage cargoes, while India's Reliance Industries Limited was offering 55,000-110,000 mt of naphtha FOB Sikka over the same period.
Naphtha cargoes high in CS2 levels are of particular concern to Japanese petrochemical end-users, because when such cargoes are cracked in a steam cracker, it can result in the production of off-spec C5 derivatives. This then affects the downstream production quality of, among other things, synthetic rubber, causing concern among Japanese petrochemical producers who have contracts to supply C5 derivatives. In addition, the high carbon disulfide levels can also cause permanent catalyst poisoning in a BTX extraction unit.
But the recommendation to introduce a maximum CS2 limit did not sit well with some market participants.
"We appreciate it's a serious matter for Japanese end-users, but we'd prefer to keep the procedure as it is right now," another panel member said. "It's difficult to put a cap on it [CS2] ... as it is not guaranteed by suppliers anywhere," he said.
The Asian naphtha industry also had concerns that applying a maximum limit on CS2 could stifle liquidity. In addition, logistical factors, laboratory testing costs, and the reliability of test methods and results were other factors raised during the meeting.
"I think that traders feel that placing a cap on CS2 will be difficult for liquidity as it will reduce the number of cargoes running around in the market," a panel member said.
With most market participants largely moving towards a general agreement on the issue, it was agreed that while there would not be maximum limit placed on CS2, "levels are to be reported and that testing will be carried out on a best endeavor basis, as soon as possible," a panel member said. In addition, logistical and laboratory testing costs are to be shared equally between the first seller and the last buyer, or end-user, in the chain.
Market participants also noted that Japanese end-users are already excluding Sikka-origin naphtha cargoes in their individual contracts, and that the industry agreement to include reporting on CS2 levels would serve to provide advance notice to end-users to prepare tanks for blending down high CS2 naphtha cargoes ahead of time. "We are happy and OK to report CS2 with the intention to allow trade and if it facilitates the nomination of cargoes into the chain," a trader said during the meeting, "because if we start to exclude cargoes and include specifications and limitations, that only makes it more difficult to trade."
Panel members at this year's meeting were representatives from Japan's Asahi Kasei, Itochu, Marubeni and Sumitomo Chemical; South Korea's Hanwha and LG Chem; and Western companies Cargill, Sietco and Glencore.