London — Petrochemical buyers in Europe are beginning to crack propane overnaphtha, reversing a seasonal pattern that has typically seen propane attractfeedstock buying in the summer rather than winter months.
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That decline has been driven by a ballooning "pro-nap" spread -- thediscount of the large propane cargo market to the large naphtha cargo market-- the measure used to track propane's attractiveness as an alternativefeedstock.
On Thursday, the propane CIF NWE large cargo market sunk to a $83.25/mtdiscount to the naphtha CIF ARA cargo market, the widest discount since May 3,2017.
The spread began to widen in mid-December, when expectations of an influxof propane product into Europe and a patchy winter heating season helpedpropane weaken even faster than naphtha.
"I think there will be extra propane cracking in Europe and Asia, [weare] starting to see some additional propane cargoes committed to cracking at[the] expense of naphtha," said a market source.
"It looks like we have switching demand all the way up to [propane at]minus $20/mt [to naphtha] and maybe beyond for some," said another sourceactive in the petrochemical market.
That push to switch from propane from naphtha has also been encouraged bymore attractive margins for lighter feedstocks versus heavier ones, accordingto a market source in the LPG market.
Ethane is the "lightest" feedstock, followed by propane, butane, naphthaand gas oil. Cracking lighter feedstocks yields more ethylene and lesspropylene, butadiene and pygas. For example, cracking 1 mt of propane produces0.4 mt of ethylene, whereas 1 mt of naphtha will produce 0.3 mt of ethylene.
Ethylene was at an 11-week high this week, though the most recentlymonthly contract settled at a rollover.
The incentive to switch to propane is unusual mainly because it typicallyoccurs in the spring, when heating demand tails off, leaving prices sinkinglow enough relative to naphtha to become an attractive alternative throughoutthe summer months.
This year, that trend has been reversed, with propane rising againstnaphtha in mid-summer 2017, moving parity to naphtha for the first time inAugust. That was driven almost entirely by supply constraints, with the closedarbitrage from the US Gulf Coast to Europe restricting the flow of inboundproduct, while demand was limited to just one major buyer on the petchemmarket.
By this winter, meanwhile, mild winter demand in Germany and other majorEuropean consumer markets had failed to meet market expectations, whileinbound market product increased, pushing propane down to a discount typicallyseen in the summer months.