Asia naphtha hit by supply overhang; demand could bounce back

A supply overhang amid feeble downstream petrochemical demand has hit Asia's naphtha market, although demand could bounce back on cracker expansion and restarts.

Spot naphtha prices have declined substantially in the first half of the year to under $500/tonne levels, pummeled by steep losses in global crude oil benchmarks.

On a CFR (cost and freight) Japan basis, naphtha prices for second-half July averaged at $465.00/tonne as of 11 June, down by a hefty $108/tonne from month-earlier levels and a 29% decline from the same period a year earlier.

Consistent volumes of western arbitrage flows to Asia did little to offering reprieve to the Asian naphtha market struggling with ballooning supplies.

Traders estimated deep-sea cargo arrivals of around 1.5m-1.6m tonnes in May, up from the average monthly volumes of around 1.2m tonnes in 2018.

Naphtha refining margins stood at $3.75/tonne as of 14 June after being  hammered into negative territory, levels not seen in over a decade, reflecting the fragile market climate.

Asia’s naphtha crack spread was at minus $9.88/tonne on 10 June and minus $15.30/tonne on 7 June. The crack spread was last seen in negative territory  in October 2008.

Also reflecting weak fundamentals, the product’s market structure remained mired in a contango, where prompt-month prices are lower than forward months.

On the demand side, end-user spot naphtha purchases for downstream petrochemical production have been rather sporadic.

Also telling of the bearish situation, recent cargo deals were done at discounts compared with premiums achieved earlier.

Taiwan’s Formosa Petrochemical (FPCC) bought naphtha cargoes totalling around 100,000 tonnes for first-half July delivery to Mailiao, at a discount of around $4.00/tonne to its pricing formula.

This contrasted with premiums near $5.00/tonne to its pricing formula FPCC forked out for June cargoes.

In a similar vein, 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.

Naphtha exports out of India also garnered lower spot differentials.

Bharat Petroleum Corp Ltd (BPCL) sold a 35,000 tonne-cargo at a high single-digit premium to its own pricing formula FOB (free on board) basis, loading on 16-17 June from the port of Kochi.

BPCL’s earlier sale of an identical volume for 15-16 May loading from the same port, fetched a higher premium near $13/tonne to its own pricing formula.

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 1.1m tonnes/year, following a prolonged maintenance.

Fellow South Korean producer LG Chem is understood to be in the process of restarting its cracker in Daesan following production disruptions.