Asia will add record naphtha cracking capacities in 2010 at a time when new Middle East plants are boosting output. 6 mln tons of capacity is expected to come onstream in this year, out of which 38% will come up in China alone. China, South Korea, Thailand, Singapore and India will add 6.3 mln tons of ethylene capacity, taking the region's total to 48.33 mln tpa. China will account for more than a third of the new capacities. Additionally, more competitive Middle East petrochemical plants, which use cheaper gas instead of naphtha as feedstock, are beginning to start up production As a result, imports into China are expected to dip, which may force petrochemical makers to reduce run rates from H2-2010, after running at almost full capacity since 2009 as per Reuters. Cracker run cuts in Asia, which analysts said would bring production to around 85% of capacity, are crucial to maintain petrochemical margins, but will hurt naphtha demand. Traders had expected the glut to trigger permanent shutdowns of polymer plants and crackers in Asia and Europe in 2009. These closures were averted because of start-up delays in the Middle East.
Naphtha suppliers will be hard hit if Asia's top petrochemicals buyer China lowers imports of ethylene and polyethylene (PE). China's annual PE demand is still expected to grow, at an estimated 7-10% between 2010 and 2011, but its imports will fall because of new capacities. China's PE import growth could be negative (vs 2009), with volumes projected at 6.5-7 mln tons this year down from 7.4 mln tons in 2009. in 2009, South Korea was the leading PE exporter to China, accounting for 18% (1.34 mln tons), followed by the United States at 13% and Saudi Arabia at 11%. The ranking is likely to change in 2010. Saudi Arabia will export more this year.
Though China is adding new crackers turning into a naphtha net importer in 2009, import volumes in 2010 are not expected to counter the fall in Asian naphtha demand when run cuts take place. South Korea, Japan and Taiwan currently have a nameplate capacity of around 19.14 mln tpa of ethylene. A 25% cut in runs would approximately amount to a naphtha demand loss of nearly 1.2 mln tons a month. Most Asian crackers, except a few such as Shell's newly started 800,000 tpa facility in Singapore and the 1 mln tpa plant run by Thailand's PTT, rely on costly naphtha as raw material to produce ethylene. Currently, ethylene sellers are keeping offers around US$1200 C&F China. However, buyers are reluctant to buy at these high levels, as they expect the additional capacities to hammer ethylene prices. Current ethylene margins are around US$200/ton having fallen by US$500/ton from the beginning of 2010. It's been falling since March, and margins could be close to zero soon. Naphtha cracks surged to 20-month highs of US$178/ton premium on Jan. 15, 2010 versus a record low at a discount of nearly US$190/ton in early November 2008. But the looming glut may start to pressure the sector.