Squeezed margins compel Asian naphtha cracker operators to cut run rates

Reduced downstream demand in the region has squeezed margins of Asian naphtha makers. Cracker operators have started cutting back run rates this month, in a bid to arrest to additional falls in olefins prices. This decision will interrupt the high operating rates that have been prevalent at the Asian crackers. The past few weeks have seen a drastic fall in prices of ethylene and propylene coupled with weak derivative markets, making it unprofitable for some producers to run at almost full capacity. Japanese ethylene makers need a spread of US$250/ton (€173/ton) with the value of feedstock naphtha to make exports viable. Ethylene margins in northeast (NE) Asia based on naphtha feed plummeted to 64.5% week on week to US$60/ton at the start of the fourth quarter, according to the ICIS. Spot ethylene prices sank to a 4 month low of US$790-810/ton CFR (cost and freight) NE Asia in early October, while propylene was traded at US$870-930/ton CFR NE Asia – the lowest level in three months. Weakness in key downstream polyethylene and polypropylene markets was partly to blame for the erosion in olefin values. The Japanese producers have initiated this round of run rate cuts as they are also saddled with inventory pressures from derivative plant turnarounds this month. Outlook is considered to be pessimistic on muted demand with the onset of the holiday week in China and South Korea. Sanyo Petrochemical has cut run rates at its sole naphtha cracker to 85-90% this month as it readies for a turnaround at its downstream plant. Mitsui Chemicals has also reduced runs at two naphtha crackers in October preceding a maintenance turnaround at a downstream petrochemical plant. Sumitomo Chemical will keep its sole naphtha cracker run rates at 70-80% capacity until H2-October due to an ongoing turnaround at downstream petrochemical units. Spot demand from China – Asia’s largest importer of ethylene, shrunk due to start-up of new crackers in the country. In Taiwan, the average run rate at state-owned Chinese Petroleum Corp (CPC)’s 3 crackers in Linyuan and Kaohsiung as well at Formosa Petrochemical Corp’s ethylene unit in Mailiao is at 90% in October. Formosa's production cuts can be linked to recent outages at its derivative monoethylene glycol (MEG) facilities. Interestingly, producers in South Korea have maintained cracker run rates at 100% for now. The market experience is that they were slower to adjust ethylene production when petrochemical prices plunged during Q4-08. The reduction in run rates is expected to intensify from November due to an anticipated further dip in petrochemical prices rather than maintenance turnarounds. The slowdown in demand from China overlaps with the new capacities coming on stream in China and the Middle East.