Analysis: China's naphtha imports thirst set to increase in Q4

Singapore — China's thirst for naphtha imports is set to grow in the fourth quarter as integrated refiner Rongsheng Petrochemical's subsidiary Zhejiang Petrochemical Co., or ZPC, starts its naphtha cracker by the end of 2019 and diverts supplies for its own consumption.

In the process, its sister company Ningbo Zhongjin Petrochemical, which was being supplied by ZPC in the last few months, will be forced to tap external markets for its naphtha feedstock requirements, executives told S&P Global Platts.

This could spur Ningbo Zhongjin to seek as much as 200,000 mt/month of heavy naphtha feedstock in Q4, which amounts to nearly a third of China's average monthly naphtha imports, the executives said.

China imported 633,892 mt/month of naphtha in January-June this year, down 1.58% from 644,060 mt/month in the same period in last year, data from China's General Administration of Customs showed.

In May, China's monthly naphtha imports fell to 77,000 b/d, when Ningbo Zhongjin Petrochemical shifted its naphtha feedstock procurement to ZPC, and also due to low petrochemical margins. But imports are now expected to rebound when Ningbo Zhongjin Petrochemical switches back to imports.

Rongsheng Petrochemical is one of three large integrated refineries starting up in China between 2019-2022, that will together add nearly 1.5 million b/d of new refining capacity, and in the process drive trade flows for both crude oil and downstream refined and petrochemical products.

Rongsheng alone will account for 0.8 million b/d of the new refining capacity through ZPC, in which it has a 51% ownership. ZPC comprises two mega-refineries of 400,000 b/d each, one expected to reach commercial operations by the end of 2019 and the second by end-2022.

ZPC began trial runs at one of its two 200,000 b/d crude distillation units in May and produced heavy naphtha that was supplied to another Rongsheng subsidiary, Ningbo Zhongjin Petrochemical Co. Ltd. as its own naphtha cracker was not ready.

RARE HEAVY VIRGIN NAPHTHA IMPORT

Rongsheng has already imported a rare parcel of heavy virgin naphtha from Malaysia to China, according to fixtures data tracked by Platts and shipping sources.

P66 fixed the Ocean Spring, a Medium Range clean tanker, to ship a 30,000 mt heavy naphtha to China's Ningbo port from Kerteh in Malaysia, for 130 Worldscale points. The cargo was delivered on August 14 for Rongsheng Petrochemical.

This trade flow is unusual as Kerteh's heavy virgin naphtha is typically consumed within Southeast Asia, and China as the largest gasoline-producing country in Asia doesn't need to import the naphtha grade. But market participants believed the cargo will be used for either gasoline blending or aromatics production.

Rongsheng's downstream demand is largely integrated with petrochemicals, in line with market expectations that competition within the aromatics stream is set to rise, along with demand for higher density naphtha feedstocks.

The spread between CFR Taiwan/China paraxylene marker and CFR Japan naphtha physical stood at $328.795/mt on Monday's Asian close, up 75 cents/mt from last Friday.

Beijing controls naphtha imports by quotas and has awarded 4.55 million mt of naphtha quota to state-owned Sinopec, PetroChina, CNOOC and Sinochem. The government is believed to have allocated naphtha quotas for a few independent petrochemical plants like Ningbo Zhongjin separately, details of which were not immediately available.

INTEGRATED REFINERIES

The new wave of China's private refiners, mainly the Hengli, Rongsheng and Shenghong Groups, are largely petrochemical-oriented as opposed to the focus on transportation fuels in previous years.

These refiners are "reverse-integrated" from the textile manufacturing and global clothing industry where their downsteam demand is focused, according to the International Energy Agency.

Ningbo Zhongjin Petrochemical is an aromatics producer with a paraxylene capacity of 1.6 million mt/year, and a downstream purified terephthalic acid capacity of 3 million mt/year. Its large production capacity makes it one of the top producers of paraxylene in China, on par with its peer Chinese Fuhaichuang which has two plants of 800,000 mt/year of the aromatics product.

ZPC has a 4 million mt/year paraxylene capacity, and under the olefins wing, a capacity of 1.4 million mt/year of ethylene and 158,000 mt/year of propylene, all in the integrated petrochemical complex in Zhoushan.

The growing importance of paraxylene, as well as other related aromatics, in the petrochemical space has been reflected in widening differentials between higher density and lighter density naphtha materials in Asia.

--Sue Koh, sue.koh@spglobal.com

--Oceana Zhou, oceana.zhou@spglobal.com

--Eric Yep, eric.yep@spglobal.com

--Edited by Nurul Darni, nurul.indriani.darni@spglobal.com