Deep cuts in demand due to naphtha cracker shutdowns in Japan to squeeze margins

18-Feb-10

An unprecedented number of maintenance shutdowns of naphtha crackers in Japan in 2010 will result in deep cuts in demand in Northeast Asia at a time of rising supply, squeezing margins. Lack of production at crackers will result in loss of demand for atleast 2.5 mln tons of naphtha- about 5% of total demand in Japan, South Korea and Taiwan, vs last year's 2% loss. About 1.6 mln tons will be lost in Japan alone, as per Reuters. Japan, which has the most cracking units in Northeast Asia excluding China, will shut 8 of its 15 crackers, with a combined ethylene capacity of 7.8 mln tpa. Outlook for 2010, post-maintenance start up is estimated to be lackluster as producers may cut run rates to ease supply from new ethylene capacities coming onstream, particularly in China. China's petrochemical imports will continue to grow along with the economy, but imports may be limited by increasing domestic supplies. Japan's top petrochemical maker, Mitsubishi Chemical Inc, is conducting maintenance at its Kashima crackers this year, as the No. 1 unit was unexpectedly taken offline last October because of a pipe malfunction. Sanyo Petrochemical will be the first to take its 470,000 tpa cracker offline in mid-February until late April. That would see a moderate loss in naphtha demand of 31,000 tons in February. Along with Sanyo, Showa Denko, Tosoh and LG Chem will also shut down in March, leading to a demand loss of at least 500,000 tons. In Asia, most crackers use naphtha as the main feedstock to produce olefins. If the drop in Japan's naphtha demand is substantial, coupled with the completion of ethane-based olefins in the Middle East, it could depress naphtha margins in the region. The Middle East will add 6.5 mln tpa of ethylene capacity by this September, exerting pressure on crackers in other parts of Asia, as the Middle East has the edge of using cheaper gas feedstocks.