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Listen: Asia LPG, naphtha to drive light ends strength in 2021, gasoline outlook mixed

This year has been a roller-coaster ride for the Asian light ends market, as the coronavirus pandemic gripped the world, slashed demand for refined oil products and forced the closure of several refineries across the region in its wake. The future of the light ends market will hinge largely on how fast the world progresses in its fight against the pandemic and its economic impact. In this podcast, S&P Global Platts light ends experts Wendy Cheong, Mark Tan, Wanda Wang, and Ramthan Hussain look ahead and explore the potential paths of the Asian gasoline, naphtha and LPG markets in 2021.

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Asia LPG, naphtha to drive light ends strength in 2021, gasoline outlook mixed

WENDY CHEONG: In today's episode, we will focus on the path to recovery for Asian gasoline and look at how petrochemical projects planned in late 2020 and 2021 spur market growth for Asian feedstocks naphtha and LPG.

Hello and welcome to this episode of Commodities Focus podcast. This year has been a roller-coaster ride for the Asian light ends market, as COVID-19 gripped the world, slashed demand for refined o il products and forced the closure of several Asian refineries in its wake. As the year draws to a close, we take stock of the current situation, and take a sneak peek into the future, to see the factors driving the Asia light ends market in 2021.

My name is Wendy Cheong, managing editor for light ends in Singapore, and to get the discussion rolling, I have with me here Mark Tan, Platts editor for gasoline, Wanda Wang, editor for naphtha and Ramthan Hussain, senior editor for LPG.

Let me start off with you Mark. The gasoline market was the hardest hit among the light ends this year because of lockdowns to control the spread of the pandemic. How do you see demand for Asian gasoline in the first half of 2021?

MARK TAN: Thank you Wendy. To answer that question, we first have to look at how demand is doing as we approach the end of the year. The COVID-19 pandemic has undoubtedly wreaked havoc on demand, with the widespread lockdowns in the first half of the year sending gasoline to record lows. Although the region has slowly recovered from the pandemic, prompting the return of domestic gasoline demand in India and China, the bearish impact of the pandemic is still persisting. In short, Asian gasoline import demand in Q42020 and into 2021 will still be fragile.

Although widespread lookdowns are unlikely to occur again, sources believe that more localized lockdowns are on the horizon as governments counter new spikes in cases across the region. At least for the first half of 2021, this fragility of demand is expected to be a mainstay, making the demand picture very uncertain. Platts Analytics expects Asian gasoline demand to drop by 525,000 b/d this year, only recovering fully sometime in late 2021.

WENDY CHEONG: I see. With the weak demand, Asian refiners have slashed operations due to low margins, curtailing supply. Do you think this will continue into 2021?

MARK TAN: I think most Asian refiners will continue to keep output at levels that are just sufficient enough to cater to domestic demand next year, without having excess cargoes for export. The reason is twofold. One, refining margins across the barrel have been persistently poor, with cracks for gasoline, gasoil and jet hovering at tepid levels. Two, uncertainty surrounding the demand environment have made long-term commitments to cargoes a concern. Key buyers such as Indonesia, Malaysia and Myanmar have sought surprise cargo deferrals this year.

However that said, we expect gasoline exports from Asia's top exporter China to stay high in 2021 amid rising refining capacity. Platts Analytics forecasts overall Chinese refinery run rates to grow by 492,000 b/d in 2021, up from the 261,000 b/d growth in 2020. Should the gasoline crack remain above gasoil and jet next year, it will further spur Chinese state-owned refiners to export more gasoline.

WENDY CHEONG: Thank you Mark. Now moving on to you Wanda. The soft gasoline demand this year has dampened naphtha demand as a gasoline blendstock and lengthened the supply of naphtha. This has dragged down the naphtha market especially in Q2 when the country-wide lockdowns were implemented globally. With gasoline demand recovery projected to be slow in early 2021, will naphtha also see a slow start to the year?

WANDA WANG: Right, well... even though gasoline is likely to stay weak early next year, we should expect naphtha to be bolstered by robust demand from the petrochemical sector. Naphtha is set to see an upswing in demand from early 2021, with additional steam cracking capacity due to come online.

South Korea YNCC's No. 2 steam cracker is expected to come back online in January 2021, after the completion of expansion works that will boost its ethylene output by 345,000 mt per year. South Korea's LG Chem is also due to start its new cracker in Q2, which can produce 800,000 metric tons per year of ethylene.

Unfortunately for LG Chem, their cracker in Yeosu has been shut due to a fire just on November 5, and this caused a significant demand loss for naphtha, as the unit typically uses 9,000-10,000 mt per day of naphtha feedstock, and is expected to be shut for a few weeks.

The market is also awaiting the restart of Lotte Chem's Daesan steam cracker since it was shut in March following a fatal explosion. The cracker's restart has been pushed back from September to early-December, however market participants said the continued delays could see the restart occur only in 2021. The steam cracker in Daesan has a production capacity of 1.1 million mt/year of ethylene, so its restart will definitely boost the naphtha market.

WENDY CHEONG: The incremental petrochemical demand next year looks set to boost naphtha prices.

WANDA WANG: Indeed, this boosted the price levels paid by some South Korean naphtha end-users on term deals for 2021. Companies with new capacity coming online have had to pay more to secure additional cargoes.

YNCC's 2021 term contract was sealed at a $7-$8/mt premium to MOPJ naphtha assessments on a CFR basis, LG Chem's contract was fixed at a $6-7/mt premium while KPIC, who does not have fresh capacity coming online, managed to obtain their 2021 term cargoes at a $3.75/mt premium.

WENDY CHEONG: I see. Does the new steam cracking capacity like LG Chem and YNCC have flexibility to switch between naphtha and LPG as feedstock?

WANDA WANG: Yes Wendy. The newer crackers are likely to have better flexibility to switch between LPG and naphtha as feedstock. LPG typically becomes economically viable as a steam cracking feedstock when its price is 90% that of naphtha, or lower.

With LPG now commanding a premium over naphtha due to winter demand for LPG for heating, steam crackers are expected to maximize the use of naphtha.

Asian LPG prices are too high now to be used as a steam cracking feedstock. Propane CFR North Asia is $95/mt above naphtha CFR Japan on November 9, according to Platts data.

WENDY CHEONG: Thank you Wanda. Looks like the incremental steam cracking capacity in 2021 will not only boost naphtha demand, but also LPG as well. Ramthan, what's in store for us in terms of Asian LPG demand next year?

RAMTHAN HUSSAIN: Hi! Asia's LPG demand in 2021 will be driven by China once more, led by additional PDH processing capacity. There will be more propane demand as Zhejiang Petrochemical's new 600,000 metric tons per year plant which started up in July, and Zhejiang Huahong's new plant in eastern China ramp up operations next year. Oriental Energy's 660,000 mt/year PDH plant in Ningbo is also due to start up end of this year.

Next year Chinese propane demand will be stoked by more PDH plants such as Jiangsu Sailboat Petrochemical's 700,000 mt/year fa cility at Lianyungang due for startup last quarter of 2021.

China currently has 11 PDH plants in operation with combined propylene production capacity of 6.71 million mt/year and can use up to 8.05 million mt/year of propane as feedstock at full capacity.

Top household LPG distributor China gas is also venturing into the petrochemical industry, via a JV with Shaanxi Yanchang Petroleum. It has started construction of a 600,000 mt/year PDH plant in the Taixing Economic Development Zone on China's eastern-central coastal Jiangsu province, which will use 720,000 mt of propane as feedstock. Though the projects which will be built in two phases and will take two years to complete, China Gas will start seeking LPG feeds tock from international markets next year.

WENDY CHEONG: I see... New PDH plants seems to be the key driving force behind Chinese LPG demand.

RAMTHAN HUSSAIN: Chinese LPG demand is also supported by an ethylene cracker by private refiner Bora Chemical, which will consume 92,000 mt/month of propan e and butane once its 1.1million mt per year ethylene cracker is operational. Further LPG demand is expected when Sinochem's Quanzhou naphtha cracker, which can also run on LPG, and Fujian Meide's 660,000 t/year ethylene cracker start up.

A major demand LPG outlet is from Wanhua Chemical's new steam cracker, with an ethylene production capacity of 1 million mt/year. This will also raise its LPG imports to around 5.5 million mt next year from around 4 million mt in 2019. At least another 11 new projects are on the drawing board in the coming years, which will add LPG demand and imports.

WENDY CHEONG: Wow, that's an incredible amount of petrochemical capacity coming up in China. What are the other demand outlets in Asia to watch out for?

RAMTHAN HUSSAIN: In South Korea, SK Advanced will start its new 400,000 mt/year polypropylene plant at Ulsan early in second quarter next year. SK Advanced has an upstream PDH plant at Ulsan with nameplate capacity of 600,000 mt/year and has been running at almost 110% of capacity this year. South Korea's LPG demand in the first nine months this year grew almost 20% year on year, while imports over the same period rose almost 15% on the year.

India, the world's second largest LPG consumer after China, is expected to see LPG demand and imports growing just 1%-2% in 2021, Indian trade sources said. This comes as LPG connection coverage is set to surpass 99% by end-2020, which will limit further import demand growth.

S&P Global Analytics expects India's LPG demand for 2020 to reach 27.2 million mt with imports touching almost 15.2 million mt, while LPG production from refineries and gas processing plants is forecast around 12.12 million mt. For now, Platts Analytics expects demand for 2021 to be around 28.3 million mt and imports near 15.6 million-15.7 million mt.

WENDY CHEONG: Thank you Ramthan. It looks like both LPG and naphtha markets will be driven by demand growth from new petrochemical projects. Coming back to you Mark. Are there any bright spots we can look forward to in Asia gasoline demand next year?

MARK TAN: Yes Wendy, I think we could see an increase in import demand from Australia and the Philippines next year. Some refineries were unfortunately forced to shut this year on low margins, which has prompted greater imports. Since the shut in of the Tabangao refinery, sources have noted a pick-up of imports from the Philippines, of around 2-3 more MR cargoes every month.

Others such as BP Australia have announced the decision to shutter its Kwinana refinery in Western Australia and convert the site into an import terminal. Following the announcement, the Asia gasoline crack jumped in the same day on expectations of greater imports.

The future of Petron's Bataan refinery in the Philippines is marred with uncertainty. The company CEO Ramon Ang told local media about the possibility of an imminent closure of the plant.

New Zealand's Marsden Point, Australia's Lytton and Geelong refinery have also announced internal reviews to determine whether operations at the refineries should continue in the low margin environment.

WENDY CHEONG: Let's hope these refineries survive the pandemic! The future of the Asian light ends market will hinge largely on how fast the world is making progress against the pandemic. For now, the Asian gasoline market looks set for a slow start to the year. But we can expect feedstocks naphtha and LPG to get a boost from new petrochemical projects in China and South Korea.

Thank you Mark, Ramthan and Wanda for your time today. Our listeners can get more info on this on our website -- Thank you for listening to the Commodities Focus podcast.