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Analysis: Asian petrochemical makers’ switch to cheaper LPG set to pressure naphtha cracks

Asian petrochemical makers’ growing use of LPG over naphtha as a feedstock, along with ample LPG supply from the US, will pressure Asia’s naphtha cracks over the coming months, market participants said Tuesday.

Asia’s biggest naphtha buyer, South Korea’s consumption of LPG — which comprises mainly propane and some butane — climbed 7.3% year on year to 9.48 million barrels in April, latest data from state-run Korea National Oil Corp. showed. This was the first increase after the consumption slumped for two months in a row.

South Korea’s largest chemical company LG Chem said it plans for a 20:80 LPG-naphtha feedstock ratio for both the Daesan and Yeosu steam crackers in July and August. The ratio suggests that out of the two crackers’ combined 2.3 million mt/year capacity, 232,323 mt of the naphtha share would be lost to LPG, according to S&P Global Platts calculations.

Typically, LG Chem adopts a 10:90 to 15:85 LPG-naphtha feedstock ratio, sources with knowledge of the matter told Platts.

LG Chem’s decision to ramp up its LPG consumption comes due to its steep discount against naphtha in recent trading cycles, industry sources said.

In May, the Far East Index propane swap traded at an average discount of $104.34/mt against the Mean of Platts Japan naphtha swap.

Many Northeast Asian end-users peg minus $50/mt as the typical propane-naphtha swap spread seen quoted in the regional market, but the growing LPG inflows from the US in recent months will likely raise expectations of a much bigger discount going forward, industry sources said.

US propane exports rose 57,000 b/d to a record-high 1.34 million b/d on April 26, topping total distillate exports for that week, according to data from the US Energy Information Administration.

Naphtha producers will face pressure in the months ahead due to headwinds from cheaper LPG amid growing gas supply, regional traders said.

The H2 July delivery laycan on benchmark Platts CFR Japan naphtha physical against ICE Brent crude futures tumbled to $7.125/mt Friday last week. This was equivalent to merely an 80 cents/b margin for refiners producing the light distillate product, according to Platts calculations. The second-line delivery laycan crack was last lower at $3.95/mt on June 13, 2012.

Monday’s Asian close had seen the new second-line trading cycle — currently pointing to the H1 August delivery laycan — bearing a physical cracks value of $10.175/mt.

SOFT LPG PRICE OUTLOOK

Even as the LPG discount to naphtha narrowed in recent weeks, LPG is still expected to remain soft going forward, as new supply from Canada hits Asia, coupled with a resurgence in Iranian shipments.

The startup of the 1.2 million mt/year Ridley Island propane export terminal at Prince Rupert in British Columbia in the second quarter has pushed more propane exports from Canada into Asia, adding to the supply at a time when shipments from the Middle East start to get heavy.

Japan’s Astomos Energy lifted its first propane cargo from the terminal in H2 May. The LPG importer signed an agreement with Canada’s AltaGas to purchase 50% of the 1.2 million mt/year propane to be shipped from Ridley Island.

Apart from the new supply from Canada, more exports are also seen from the Middle East. Iran LPG exports rose in the first half of this year, after it nearly ground to a halt in November and December following the re imposition of US sanctions on November 4.

Market sources said around nine mixed propane/butane cargoes totaling 396,000 mt, were lifted in May, while 528,000 mt loaded in April.
EXPENSIVE NAPHTHA CONTRACTS

Asian petrochemical companies were adopting a cautious stance in recent term naphtha contract negotiations with the Middle Eastern suppliers after UAE’s Abu Dhabi National Oil Co. recently concluded its term supply deals for the July 2019-June 2020 cycle at high cash premiums.

The cash premiums for low sulfur naphtha from Ruwais West Refinery was inked at plus $16.0/mt to the ADNOC formula on an FOB basis, with splitter grade naphtha trading at plus $17.0/mt, low sulfur naphtha from Ruwais refinery-East sold at plus $18.0/mt and paraffinic naphtha at plus $20.0/mt.

The levels were sharply higher than ADNOC’s previous January-December 2019 term cycle, where cargoes were inked in the range of plus $13-$16/mt from the affordable splitter naphtha grade to the superior paraffinic naphtha.

Several traders were dismayed with the high term naphtha prices asked by the Middle Eastern supplier, despite the prolonged weakness seen in the Asian naphtha market so far this year, and hence reduced their intake on the term supply, according to sources.
Source: Platts

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