Asia naphtha demand growth at four-year highs

Robust demand for petrochemicals will support Asian naphtha premiums in 2014 and hold the market steady, traders and analysts said, although the record highs seen in Q1-2013 are not expected to be repeated, as per Reuters. The expectations for naphtha's third year of strength come amid oversupply of most other oil products. New oil refining capacities have flooded Asian markets with fuels such as diesel and jet fuel, as demand growth in second-biggest oil consumer China rose at its slowest pace in two decades last year. Naphtha, though - used in Asia to make the plastics needed in everything from mobile phones to car interiors - is in short supply despite all-time-high volumes coming in from the West. "Asia's naphtha market should hold firm this year although spot premiums are not expected to be hitting record levels as seen in first-quarter of 2013 because we are not seeing the same intensity of refinery maintenance this year compared to last," said a Singapore-based naphtha trader. Indian naphtha spot premiums on a free-on-board (FOB) basis averaged about US$33/ton across 2013, a record high. Amid the heavy refinery maintenance of the first quarter, premiums on some cargoes ranged as high as US$70/ton. FOB Indian cargoes serve as a key indicator for spot premiums as India is one of the top two exporters of spot cargoes to Asia, with the other being the Middle East. The previous record for a yearly average for FOB India premiums was just over US$30 in 2012, up from US$17.50 in 2011. Indian spot premiums so far this year have averaged about US$31/ton for loadings in January and February. Naphtha traders say the premiums should average around US$30 for the year, although spot deals have recently turned bearish due to upcoming cracker maintenance in Japan. The strong premiums should support the 2014 Asian naphtha cracks, the profits or losses from refining Brent crude into the light fuel. The cracks in 2013 ended at a three-year high of US$115.52 a tonne NAF-SIN-CRK and are likely to end on a similar high note this year, industry sources said. The strong naphtha values, however, probably will not give much relief to overall refining margins that have been pressed lower by ample supplies of distillates, which make up about 40% of an oil processing plant's output. Naphtha together with gasoline account for only about 20 to % of a typical refinery's output. Asia's naphtha demand is rising as new cracker capacities start up, partly to meet rising plastics use in China, Asia's top petrochemicals consumer. Demand for polyethylene, for instance, a key intermediate used in making plastics and a derivative of naphtha, is expected to grow at an annualised rate of 7.1% for the period 2013-2018, said JP Nah of IHS Chemical Insight. China may import 9.5 mln tons of polyethylene this year to break last year's record 9 mln tons. The Philippines' JG Summit Petrochemical Corporation is starting up the country's first naphtha cracker in March, while Taiwan's CPC Corporation brought on a new cracker last August. These two cracker will need a total of at least 270,000 tons of naphtha a month, traders said. Apart from these, most Asian crackers are expected to run at maximum capacity this year to feed demand. Asia's demand for naphtha may rise by 3.1% to 181.5 mln tons in 2014, the highest growth rate since 2010, according to a forecast by Suresh Sivanandam, senior analyst of oils research for Asia Pacific at Wood Mackenzie. ESAI's Vivek Mathur is projecting a 2.6% demand growth to about 170 mln tons this year versus supplies of around 130 mln tons in Asia. The consensus is that Asia will experience an average monthly shortfall of nearly 4 mln tons, according to industry sources who track the product's supply and demand. The Middle East will meet about two-thirds of Asia's supply void in 2014, while another quarter will be met by Europe, the Mediterranean and North Africa, said David Wech, managing director of JBC Energy. "The remaining flows will come in from Russian and the United States," he said, pegging Asia's net naphtha imports for 2014 at 47.5 mln tons, the highest ever. Arbitrage volumes into Asia hit a record high of 1.7 mln tons for January arrival. The monthly average for 2013 was 1.1 mln tons, double that of 2012.