Nascent recovery in naphtha prices as producers cut run rates: Are further cuts in run rates possible?

26-Nov-08
In a bid to get the deteriorating naphtha markets on track, several key Asian producers have reduced run rates to 70-80%, or announced plant shutdowns- thereby eliminating over 470,000 ton/month of ethylene output in the region. Formosa had shut a unit producing 1.2 mln tpa, Yeochun NCC shut one unit reducing capacity by 50% at its 1.8 mln tpa complex and SK Energy shut one of its two naphtha crackers in October for the first time in its 35-year operation until March/April. This pulling out of over 30% of East Asia's total capacity, excluding China, has helped the players to cope with low demand in the continent. In fact, the process of reducing run rates was initiated at the crackers way back in March, when the early signs of weakening of the sector from a 5 year uptrend emerged. The downtrend was further strengthened by wavering demand from China amid a global financial and economic meltdown. Will the market situation improve in Asia if the crackers further reduce run rates? Apparently the answer is NO. Globally, economies will take a minimum of 6 months to start the recovery process, hence majors are likely to maintain cracker runs at around 70% - a lower level could possibly be unviable because of high fixed costs and utilisation costs. Partial shutdown could be a possibility, but since most key players have to meet the demand of long term clients, a total idling of capacity seems impossible. Also, once a plant is totally idled, it takes quite some time to get it back on stream. Cracker operators could lose valuable time in meeting needs of the market, when demand picks up, due to this time lag. Another problem is deferring of feedstock procurement. Larger cuts could also disrupt the entire petrochemical chain and affect production of bye-products.
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