The growing Asian petrochemical industry is short of naphtha as a feedstock. As a result, naphtha trading is set to thrive in Asia, prompting more traders and banks to set shop in the region to capitalise on rising spot cargo flows across regions. As per Reuters, most North Asian naphtha buyers are shifting from long-term contracts with Middle East producers to flexible spot purchases, intensifying the need to hedge risks via the swaps market in a sector prone to cyclical fluctuations in prices and margins. The fundamental shift from term deals with producers Saudi Aramco, Kuwait Petroleum Corp, Abu Dhabi National Oil Co and Qatar's Tasweeq to spot trades is boosting trade liquidity.
7 trading firms have opened naphtha desks in the Singapore oil hub since 2009, and two plan to follow, adding to over 10 established physical players in the industry, including Vitol, JPMorgan, Shell and Marubeni. This may lead to a buyers' market, as traders undercut each other with their arbitrage or spot cargoes, while rising supplies from regional refineries dampen trading margins. Such risks also offer opportunities for banks. Morgan Stanley, JPMorgan, Citibank, Societe Generale and Australia's MacQuarie have started or boosted naphtha hedging services along with their physical trades in the past 12 months.
Asia is a growing market and the region will need to import more naphtha in the future, from long-hauled regions like Latin America. This change in trade flows creates excellent business opportunities for the traders. FACTS projects total Asian demand in 2011 to reach 3.68 million bpd and net supply deficit of 1.0 million bpd, vs 2010 demand at 3.47 million bpd and a net supply deficit of 990,000 bpd.
In H1-2011, Asia received from the West nearly 2 mln tons naphtha, averaging over 300,000 tons a month, to make up for lower refinery runs and maintenance shutdowns. This is also swamping Asia with excess spot supplies, with almost 1 mln tons of Gulf cargoes bound for Asia in July and August. The huge volume forced some 300,000 tons of August shipments to be diverted west. The last time the traditional flow from Europe to Asia reversed as traders sought better margins was during the 2008 financial crisis.
The imports matched last years's volumes, but were marginally higher than in 2008. Naphtha swaps volumes have also risen in the past two months, with at least 495,000 tons transacted in May and 556,000 tons in June. For July, 510,000 tons were traded till Friday and looks set to exceed June volumes.
However, physical traders caution against the pitfalls from the rush into a naphtha market that has traditionally seen smaller trade volumes as compared to other products. As competition heats up, attrition could follow.
Naphtha cracks in July are less than 10% of January values as petrochemical demand could not match the spot glut, data from consultancy CMAI showed. Naphtha cracking margins, which were more than on have since fallen to less than US$40/ton in July.