Asia naphtha market under pressure as crackers eye cheaper alternative LPG

Crackers in Asia are expected to switch to cheaper alternative feedstock LPG to meet shortfalls of naphtha whose supplies from the west is set to drop to a four-month low in August, four sources who track the shipments said.

Cumulative east-bound naphtha cargoes from Europe, the Mediterranean and the United States will fall at least 40% in August to 1.6 million-1.7 million tons from May’s record high due to run cuts in Europe, they said. That is about 7-9% lower versus July, they said. NA-SASWAR-MFZ

Buyers, most of whom are operating their crackers at full-tilt, are expected to turn to LPG, whose prices have recently started weakening. That could exert further pressure on naphtha spot prices and margins, which hit a one-month low of $62.23 on Friday. NAF-SIN-CRK

Petrochemical makers who operate naphtha crackers typically can replace 5% to 15% of their key feedstock with LPG.

While most have term supplies of LPG, they would buy some spot cargoes but only when the prices are trading at a discount of at least $50 a tonne to naphtha.

Strong demand for LPG, a mixture of propane and butane, had kept its spot prices high until June.

But based on data from Argus Media, the Argus Far East Index (AFEI) for prompt butane on a CFR basis for the week ended June 7 flipped to a discount for the first time since March against Reuters naphtha price assessment NAF-1H-TYO, with the discount widening to at least $80 a tonne from second-half of June.

“We expect LPG demand for cracking to increase in July/August as light olefins prices continue to strengthen while LPG’s price discount continues to steepen against naphtha,” said Aaron Cheong of Energy Aspects.

Light olefins, the building blocks for plastics, are obtained through cracking of naphtha or LPG.

As cracking LPG feedstock produces around 10% more light olefins per tonne of feedstock compared to naphtha, there is a strong incentive for cracker operators to produce more light olefins via lighter feedstocks to maximise profits,” Cheong added. (Reporting by Seng Li Peng; Editing by Muralikumar Anantharaman)

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