Supply overhang amid weak downstream demand from petrochemical sector in Asia

20-Jun-19

A supply overhang amid feeble downstream petrochemical demand has hit Asia's naphtha market. ICIS News reports that demand could bounce back on cracker expansion and restarts in Tokyo, Japan.

Battered by steep losses in global crude oil benchmarks, spot naphtha prices have declined substantially in H1 of the year to under US$500/ton levels. Traders estimate deep-sea cargo arrivals of 1.5-1.6 mln tons in May, up from the average monthly volumes of around 1.2 mln tons in 2018. Consistent volumes of western arbitrage flows to Asia have added to the woes of the Asian naphtha market.

On the demand side, end-user spot naphtha purchases for downstream petrochemical production have been rather sporadic. Amid the bearish situation, recent cargo deals were concluded at discounts vs premiums achieved earlier. Taiwan’s Formosa Petrochemical (FPCC) bought naphtha cargoes totalling around 100,000 tons for H1-July delivery to Mailiao, at a discount of around US$4/ton to its pricing formula. This contrasted with premiums near US$5/ton to its pricing formula FPCC forked out for June cargoes. As per ICIS, South Korea’s Yeochun NCC (YNCC) bought naphtha first-half July delivery naphtha at a deeper discount than its previous purchase of second-half June supplies.

Further exacerbating the bearish scenario is the greater availability of cheap alternative feedstock liquefied petroleum gas (LPG), which was dampening demand for naphtha. The market could turn a corner with demand potentially increasing when cracker operations run smoother along with an expansion. South Korea’s Hanwha Total Petrochemical is expanding its cracker located in Daesan with an ethylene capacity of 1.1 mln tpa, following a prolonged maintenance. LG Chem is understood to be in the process of restarting its cracker in Daesan following production disruptions.