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Feature: China boosts Mar naphtha imports on run cuts, but active buying may be short-lived

Highlights

CNOOC and Unipec seek spot March naphtha imports as supply falls

Chinese petrochemical producers cut runs by 10%-20% on outbreak concerns

Low naphtha price draws buyers

Singapore — Chinese importers were actively seeking spot naphtha barrels for March delivery to compensate for lower domestic supply, after refineries reduced operations amid a drop in overall oil product demand following the coronavirus outbreak, market sources said this week. But this incremental demand may be short-lived.

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The current rise in spot Chinese imports, which have helped to strengthen naphtha crack spreads, is expected to be a short-term move to fill urgent feedstock needs, as domestic petrochemical producers are also reducing operating rates at their plants due to the health scare, and that would eventually reduce demand for naphtha feedstock, traders said.

"Both CNOOC and Unipec issued [buy] tenders for March because of a lack of naphtha supply, so it looks like the coronavirus' impact on naphtha demand won't be as big as expected," a South Korean end-user said.

Chinese end-user CNOOC last bought 80,000 mt of naphtha for January 15-February 5 delivery, and another 80,000 mt for January 27-February 10 delivery, sources said. For March, the company has so far bought via tender 50,000 mt or 80,000 mt of naphtha with minimum 65% paraffin content for March 1-20 delivery to Huizhou, sources added.

Chinese trader Unipec is, however, rarely seen buying spot cargoes as it typically uses naphtha produced from its own system as feedstock, so its spot demand is dependent on the run rates of its refineries. The company did not buy any spot cargoes for February delivery, and recently awarded a tender seeking a few 25,000 mt open-specification naphtha cargoes for March delivery, they added.

"We are buying based on system needs," a Unipec source said. "Our system is very big. We plan our purchases based on the monthly domestic situation in China. We need to take care of domestic supply first," the source added.

Results of both March tenders were not immediately available.

CHINA CUTS REFINERY RUN RATES

Analysts expect China's February crude throughput at refineries to fall by 1.8 million-2 million b/d, as the economy has been aggravated by the coronavirus outbreak. The country's refinery throughput in December was 13.84 million b/d, based on data from National Bureau of Statistics. The January crude throughput figure is not available yet.

China's 160,000 b/d Sinopec Anqing refinery in central Anhui province plans to shut a 4 million mt/year crude distillation unit, 1.4 million mt/year FCC and 1 million mt/year delayed coker unit in February, cutting overall run rates to 55% from the original plan of 94% for February due to manpower shortage and reduced demand after the coronavirus outbreak, according to an earlier S&P Global Platts report.

The 170,000 b/d Sinopec-SK Wuhan Petrochemical refinery in central Hubei province cut its utilization rate to 63% in February from 99% in January on lower demand, a refinery source said.

China's 200,000 b/d West Pacific Petrochemical Corp. refinery in northeastern Liaoning province cut its throughput to 630,000 mt for February from the originally planned 710,000 mt, translating to a fall in utilization rate of 79.3% from 89.4% initially planned for the month, Platts reported previously.

Independent refiners in Shandong province have also reduced their average run rate to around 45% this week, down further from around 48% in early February, and 64% in January, according to a weekly survey by JLC, a Beijing-based energy information provider.

PETROCHEMICAL PRODUCERS CUT RUNS

China's petrochemical producers have also cut run rates at steam crackers and aromatics plants, a China-based petrochemical producer said.

"Refinery and petrochemical run rates are down," the source said. "Petrochemical operations are generally down by 10%-20%. Before the Lunar New Year, operations were at full capacity," the source said, adding that some plants have even cut back to around 70% of capacity.

The producer also said the company's heavy naphtha demand has fallen by around two MR-sized cargoes due to 10%-20% run cuts at the aromatics complex, but the import volume may not fall in tandem for now, as the company will still import due to low international prices, for stocking purposes.

The benchmark C&F Japan naphtha price has declined significantly, tracking lower crude oil prices, making the product more economically attractive to buyers. Prices slid to a five-month low of $469.50/mt on February 5, before rebounding to $484/mt at the Asian close Tuesday due to robust demand from China, South Korea and Japan, Platts data showed.

Tuesday's price represented a $99.625/mt fall in just a month, from the year's peak of $583.625/mt on January 6, due to weaker crude.

However, with additional spot demand from China and steady demand from North Asian end-users, the C&F Japan naphtha crack against front-month ICE Brent crude futures rose to a near one-month high of $79.375/mt Tuesday. The crack was last higher on January 15 at $84.675/mt, Platts data showed.

Market sources fretted that the drop in operating rates and hence naphtha demand from Chinese petrochemical producers may eventually translate to lower naphtha imports.

"If China's demand is less, we will be in trouble as we export our length to China and would face high inventory levels, so would need to reduce cracker operation rates," a South Korean source said.

"The big factor moving forward is downstream demand from China, but we can't estimate what will happen as it is still a developing situation, however, China's economic slowdown does affect the downstream demand too," a Singapore-based trader added.

"We don't know if China will need to import finished petrochemical products or feedstock, [or] if Korea and Japan would need to increase output to export petrochemicals to China," a source with a Japanese refiner said.

Asia's fourth biggest naphtha importer, China, imported 5.818 million mt over January-November 2019, down 15.11% year on year due to higher domestic production, data from the General Administration of Customs showed.

China's naphtha output in 2019 stood at 38.97 million mt, up 3.1% year on year, according to latest data from the National Bureau of Statistics.