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Analysis: Asian naphtha's strength set to last through Q3 as new capacity boosts demand


Platts Dirty Tankerwire

Analysis: Asian naphtha's strength set to last through Q3 as new capacity boosts demand

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Asian naphtha's recent rally on the back of robust demand and supply fundamentals has boosted both physical and paper markers to multi-year highs -- and industry sources expect this strength to last through the third quarter as new and expanded olefins and aromatics units boost regional demand.

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"The unseasonal strength seen in Asia LPG prices since June will continue to keep naphtha as the more economical feedstock for cracker operations. This trend may last for the remainder of the year, further boosting demand for naphtha as cracker runs increase," said Aaron Cheong, senior feedstock analyst for light ends and NGLs at S&P Global Platts Analytics.

Platts Analytics forecasts Asian demand for naphtha as a steam cracker feedstock will remain strong in Q3 as new cracker capacities start up and stabilize operations.

The startup of new paraxylene capacities and a gradual recovery in gasoline demand will also ensure reformer runs will be kept high into Q3, in turn supporting higher demand for heavy naphtha in the region, Cheong added.

Highlighting this bullish outlook, the CFR Japan naphtha physical crack against front-month ICE Brent crude futures rallied to a multi-year high of $127.60/mt at the Asian close July 12, up $4.575/mt (3.72%) day on day and up $6.775/mt (5.61%) week on week. The crack was last higher on Jan. 8, 2016, at $127.90/mt, Platts data showed.

The benchmark C+F Japan naphtha flat price has also been pushed up by high crude prices to average $689.56/mt over July 1-12, up from $643.92/mt in June and $602.15/mt in May, Platts data showed.

Robust naphtha appetite

Asia's naphtha demand has been boosted since H2 June, with the startup of new South Korean crackers and the return of Lotte Chemical's Daesan cracker from maintenance.

Moreover, naphtha-fed steam crackers are operating at full or close to full levels due to positive olefin margins, and LPG is economically unviable as an alternative feedstock, sources said.

The key CFR Northeast Asia ethylene spread to benchmark C+F Japan naphtha cargo was assessed at $295.125/mt July 12, up $13.125/mt week on week, Platts data showed.

This was above the typical breakeven spread of $250/mt for integrated producers, which would keep naphtha in demand as crackers continue operate at high levels, and also allow steam crackers to afford naphtha with higher paraffin content to maximize olefin output, sources said.

Limited arbitrage supply

Fewer East-bound arbitrage naphtha cargoes are expected from the West in July as Europe was tight on supply due to both petrochemical and gasoline blending demand, sources said.

Europe's naphtha market has tightened drastically since the start of July, with the front month August NWE crack to Brent surging from minus $1.22/b on July 1 to a near five-month high of plus 65 cents/b on July 12, Platts data showed. This market strength has squeezed arbitrage economics, sources said.

Chartering activity had been tepid for the July-loading program, with just 830,000 mt heard booked for Europe to Asia voyages loading in H1 July, market sources said. Few fixtures were also heard for US Gulf Coast to Asia naphtha shipments, with only 130,000 mt of such fixtures spotted for H1 July loadings, market sources said.

Asia is net short of naphtha, and relies on Western arbitrage shipments to supplement its regional shortage of typically 2 million mt/month, sources said.

Strength in naphtha swaps

The firm sentiment was reflected on the derivatives front, as the front month August C+F Japan naphtha swap crack to Dubai -- a measure of the product's relative strength to the crude it is refined from -- was assessed up 16 cents/mt day on day at 3 1/2-year high of plus $3.30/mt at the Asian close July 12. This was up 22.22% week on week and a 76.47% increase since the start of July. The spread was last assessed higher on Dec. 29, 2017 at $3.61/mt, Platts data showed.

Meanwhile the key Japan naphtha swap backwardation has steepened. The front month August-September Mean of Platts Japan naphtha swap spread widened $1/mt week on week to a four-month high of $9.25/mt at the Asian close July 12, Platts data showed. The front-month time spread was last wider on March 8 at $10.50/mt, Platts data showed.

Further down the curve, the Q4 2021-Q1 2022 naphtha C+F Japan swap spread -- an indication of medium to longer term sentiment -- was assessed at a four-month high of plus $22.42/mt at the Asian close July 12, widening $1.42/mt from July 9. The spread was last wider on March 8 at $22.75/mt, Platts data showed.