Naphtha-fed steam cracker runs remain curbed despite high ethylene margins

An upswing in ethylene markets has not tempted naphtha-fed steam crackers to increase run rates in September as unhealthy margins to produce derivative downstream products continue to hamper overall economics, leaving the ethylene market facing a short-term supply squeeze due to planned turnarounds.

Ethylene supply is expected to tighten with several turnarounds scheduled at naphtha-fed steam crackers slated to begin in September and October, given current cracker run rates in Asia are estimated at 75%-80% of capacity.

“Downstream plants have been not been keeping high inventories due to poor margins, so when ethylene supply is cut, several will be short and either have to buy additional spot cargo or reduce operating rates,” a trader in China said.

Supply in China’s domestic markets is also very tight, “so this is keeping ethylene demand up at the moment,” the trader added.
The key spread between CFR Northeast Asia ethylene and C+F Japan naphtha physical widened to $334/mt at the Asian close Sept. 5, up $34/mt from the previous session, S&P Global Commodity Insights data showed. The spread was last wider April 28 at $350.50/mt.

This was within healthy levels for some ethylene producers, as the typical breakeven spread for non-integrated producers was $350/mt and for integrated producers $250/mt, sources said.

Platts assessed CFR Northeast Asia ethylene up $30/mt from the previous session at $1,000/mt Sept. 5; it was last higher June 16 at $1,010/mt. Platts is part of S&P Global Commodity Insights.

Near-term sentiment for ethylene remains bullish, with several market participants citing the supply constraints. Buying interest for late-September and October is expected to stay firm as several end-users remain short on cargo. However, producers remain cautious about considering run rate increases, citing upstream volatility and unclear market direction downstream.

“There is a possibility of increasing operating rates slightly, maybe by 10%, to meet the demand, but this is dependent on whether these spreads between ethylene and naphtha can be sustained,” a South Korean producer said.

“Crackers have made losses for many months now and naphtha prices are still very volatile. It will not make sense for us to increase our operating rates if ethylene demand cannot be sustained and prices start falling again due to weak PE,” the producer added.

PE-naphtha margin unprofitable

However, derivative downstream margins for polymers were unprofitable, dampened by economic slowdown in China.

Production margins for key derivatives such as polyethylene, styrene monomer and ethylene glycol remain squeezed, which could cap ethylene demand in the longer term.

“We needed to buy additional cargo in order to keep our PE plant running, but as our current operating rate is at 80%, and there is room for us to reduce to 70% if the margins do not improve,” a Northeast Asian buyer said.

“Demand has improved slightly, but we will definitely reduce our operating rates if prices of ethylene continue to surge as it doesn’t make sense to continue making losses on PE production,” the buyer added.

The spread between HDPE film CFR FE Asia and C+F Japan naphtha physical was assessed up $4/mt from the previous close at $254/mt Sept. 5. This spread has remained below the typical breakeven of $450/mt for the year to date.

Length in the Asian naphtha market from higher refinery run rates and short demand from most naphtha-fed steam crackers operating at less than full capacity has weakened trading sentiment.

Asia’s naphtha end-users have been slow to start purchases for the current trading cycle for H2 October delivery cargoes into North Asia, with only one buy tender heard from Japan.

Reflecting the lack of strength, the CFR Japan naphtha physical crack against front-month ICE Brent crude futures was assessed at minus $50.40/mt Sept. 5, down $8.50/mt from Sept. 2.
Source: Platts