Asian LPG prices reached the lowest level in nearly five months, flipping the CFR North Asia propane versus January CP swaps differential to discounts, amid growing demand concerns in the wake of the omicron variant of the coronavirus, traders said Dec. 3.
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LPG's slide -- also prompted by concerns over feedstock demand on news of the delayed startup of Jiangsu Sailboat Petrochemical's new propane dehydrogenation plant and South Korean Taekwang Industrial's plans to trim run rates on hitherto costly propane -- narrowed the premium of January FEI propane to Mean of Platts Japan naphtha assessment to the lowest in four months.
"I feel in the beginning, demand was bearish for the physical side, as Far East players have enough inventory at the moment," one North Asian trader said, adding that winter is just beginning and heating demand is still low.
"Suddenly, the concerns over new variant omicron happened, it puts the market under pressure. But it is too much of a reaction, I feel."
Another North Asian trader said, LPG's decline was due to "crude's move", while a Western trader said the immediate impact of omicron on the LPG market was not yet clear.
"With the current downtrend of crude, which would further lead to a downtrend of the FEI itself, it may lead importers to start moving to buy to top up their stocks," the North Asian trader added.
Propane turns cheaper to naphtha
S&P Global Platts assessed front-cycle H1 January CFR North Asia propane at $649.5/mt on Dec. 2, down $49.5/mt on the day, and matching the level last seen on June 30.
The differential between CFR North Asia propane to January CP swaps switched to a 50 cents/mt discount Dec. 2, from a premium of $11/mt the previous session, the first time since Feb. 17 it was in a discount at minus $3/mt, Platts data showed.
Brokers pegged the Argus Far East Index, or FEI swaps -- indicating the CFR North Asia LPG market -- at $639/mt on Dec. 3, versus $647/mt valued Dec. 2, reflecting persistently bearish market sentiment.
The Western trader said LPG's recent downtrend came amid a mild winter in the US. "The US is warm and inventory/production are healthy. Winter demand is not there yet and PDH margins were bad for some time. After the price drop, the [demand] situation looks far better," he said.
While weaker crude also impacted naphtha prices, the fall in LPG was steeper, narrowing the premium of January FEI propane swaps to the Mean of Platts Japan naphtha assessment to 50 cents/mt versus $35.25/mt, the lowest since July 15, when it was at a $10/mt premium. On July 14, the FEI propane-MOPJ naphtha spread was at a discount of $8.25/mt.
Traders said as the physical propane-naphtha differential turns to discount, North Asian crackers are starting to consider using LPG as alternate feedstock, dampening naphtha demand as key steam cracker feedstock.
"We're very keen to buy LPG at the moment" a South Korean end-user said.
The physical spread between CFR North Asia propane versus CFR Japan naphtha turned to a discount of $12.75/mt at the Dec. 2 Asian close, Platts data showed, down $57.75/mt on the week. The physical spread was last negative on July 29 at minus $1.25/mt.
The narrowing spread has been closely tracked by end-users, as LPG produces more olefins than naphtha feedstock, sources said.
LPG typically becomes economically viable as steam cracking feedstock when its price is 90% that of naphtha, or lower.
China's Jiangsu Sailboat will delay the start of 700,000 mt/year PDH plant to Q1 2022 from late-December, which would lead to 50,000-60,000 mt/month of supply available in the market, or 100,000-120,000 mt for the two-month period, traders said. In addition, South Korean Taekwang Industrial's plans to cut rates of its 300,000 mt/year PDH unit to 90% starting Dec. 1, could prompt a demand reduction of some 2,500 mt/month, they added.
Still, the Western trader said while propane demand would be limited by these events, the overall PDH sector could see improved buying appetite due to lower propane costs.