The Asian propane market's rise to a four-week high versus naphtha, partly because of strength in the natural gas market and amid low supply of propane globally, has left LPG struggling to find a place as an alternative steam cracker feedstock.
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"The high cost of natural gas in Asia will ensure that LPG remains an economical alternative for heating," S&P Global Platts Analytics senior light ends feedstock analyst Aaron Cheong said.
"As such, the LPG-naphtha price spread will continue to widen, which will support higher demand for naphtha as a steam cracker feedstock."
Trade sources said LPG stocks were low in Japan, but high in South Korea. LPG is a rival feedstock to naphtha for steam crackers and is typically used when its price is up to 90% of naphtha.
LPG typically rises to a premium to naphtha each year around October with the start of propane stockpiling for heating demand during the winter. However this year, it has been uneconomical compared with naphtha as a cracker feed since May.
CFR North Asia H2 October delivery propane was assessed at $785.50/mt on Sept.16, which was the highest since October 2014, S&P Global Platts data showed, ahead of regional buyers determining the full extent of winter heating demand.
Chinese LPG demand
The LPG rally in Asia has come even with Chinese demand for propane dehydrogenation plants in a lull. State-owned Yantai Wanhua will shut its 750,000 mt/year PDH units for a month for works from mid-September, while Oriental Energy closed its two PDH plants and three polypropylene plants in Ningbo in August.
The plants were expected to resume operations in October, which could revive Chinese LPG demand, trade sources said, helping to boost PDH operating rates from the average of 68% in August -- versus 86% in July -- amid meager processing margins.
Trade sources said with the rebound in PP prices this week, margins are expected to recover and lend support to PDH rates.
Meanwhile, there has been growth in Western arbitrage naphtha supply, sources said.
The US Energy Information Administration said in a Sept. 15 report that propane prices at Mont Belvieu, Texas -- the main US hydrocarbon gas liquids hub -- had risen 120% year on year to $1.12/gal in the week to Sept. 10, 2021.
Propane wholesale prices are at their highest weekly average since February 2014, and the recent rise in US prices has occurred even with production, which averaged 2.3 million b/d from January to June, being significantly higher than domestic consumption.
The share of domestic demand for US propane supply has been falling steadily. In H1 2014, domestic consumption took 83% of supply, but in 2020 it accounted for 51%, indicating the export market is a significant contributor to US propane prices, the EIA said. The US exported an average 1.3 million b/d of propane in H1 2021, up 230% from H1 2014.
While US propane inventories typically build during the low-demand summer months, this year's high prices resulted in strong export demand, meaning stocks rose at a slower clip over April-September than in previous years.
Between the first week of April and the second week of September, US propane stocks rose 31.3 million barrels, the slowest pace since 2013 and 9.5 million barrels less than the 2016-20 average, the EIA said.
Meanwhile, the Asian naphtha market has seen support from rising crude markets and healthy olefin margins. However, US Gulf supply disruptions and downstream ullage issues are dampening sentiment.
Crude's upswing pushed benchmark C+F Japan naphtha flat price up $23.875/mt week on week to a seven-week high of $696.50/mt at the Asian close Sept. 16, Platts data showed.
Olefin margins remaining positive has driven demand for naphtha as a cracker feedstock. Asia's ethylene-naphtha margin rose $21.125/mt week on week to $413.50/mt on Sept. 16, well above the breakeven level of $350/mt for non-integrated producers. The spreads are likely to keep many crackers operating at full, or near full, levels.
The use of naphtha compared with LPG yields less ethylene, making LPG desirable as a feedstock when olefin margins are positive. The ethylene production yield from naphtha is 0.32, while LPG cracking increases it to 0.36-0.40, market sources said.
Naphtha supply has tightened due to recent weather-related disruptions in the US Gulf. As recovery from Hurricane Ida is underway, the region was had to face the impact of Hurricane Nicholas, which made landfall early Sept. 14, triggering widespread flooding and power outages in Louisiana and Texas.