US arbitrage naphtha's star rising on Asian cracker expansion wave

13:26 PM | February 12, 2021 | OPIS staff and Mark Thomas

US arbitrage feedstock naphtha is set to gain in importance to Asian buyers in the first half of 2021 as they expand steam cracker capacity at a time when Middle East producers boost reformer capacities and increase their own captive naphtha use, according to IHS Markit.

Against a backdrop of lower refinery runs worldwide, the combined Asia and Middle East net naphtha shortfall is forecast to average 2.4 million metric tons (MMt) in the first quarter of 2021, compared with 2.1 MMt in December 2020. The gap will be met mainly by arbitrage volumes, according to a recent IHS Markit Asia and Middle East Petrochemical Feedstock Markets short-term outlook. “East is getting tight on paraffinic barrels. Definitely, arbitrage is increasingly more important, and more so US cargoes,” says one trader.

Asian demand for naphtha is growing, with new crackers planned in China, South Korea, Thailand, and India, and petchem producers able to switch feedstocks are cutting usage of liquefied petroleum gas (LPG) due to currently less attractive LPG-cracking economics compared with naphtha. Yeochun NCC (Seoul, South Korea) in January restarted its No. 2 cracker with an expanded ethylene capacity of 930,000 metric tons/year, and LG Chem (Seoul) is expected to commission a new 800,000-metric tons/year mixed-feed cracker at Yeosu, South Korean, in the second quarter of this year. GS Caltex (Seoul) and Hyundai Chemical (Daegu, South Korea) each have plans to start up new mixed-feed facilities, with respective capacities of 700,000 metric tons/year and 750,000 metric tons/year, in the second half of 2021, according to IHS Markit reports and sources.

In Southeast Asia, PTT Global Chemical (Bangkok, Thailand) is due to commission a naphtha cracker in February at Map Ta Phut, Thailand, with 500,000 metric tons/year of ethylene capacity. A ramp-up of JG Summit’s expanded cracker capacity, however, is likely to be postponed from the first quarter, says IHS Markit’s latest Asia Light Olefins report. JG Summit completed a 160,000-metric tons/year ethylene expansion at Batangas, Philippines, in the first quarter of 2020, but higher runs were postponed owing to delays in associated projects.

In India, HPCL Mittal Energy is set to commission a 1.2-million metric tons/year plant at Bathinda in the fourth quarter of 2021, using a mix of naphtha and gas. Half of India’s existing cracker capacity uses ethane as feedstock, according to IHS Markit’s Chemical Economics Handbook.

In the near term, Middle East shipments of naphtha are expected to decline because of restrained refinery runs and the start-up of new naphtha-consuming units, together with maintenance works. Shipments from Kuwait are expected to be curtailed by a turnaround at the Mina al-Ahmadi refinery in March and April, and reformer and condensate fractionator capacity additions at the Emirates National Oil Co. (ENOC) Jebel-Ali condensate refinery will captively consume more naphtha, IHS Markit says. Saudi Aramco is expected to bring onstream new reformer capacities at its new 400,000-b/d Jazan refinery and Ras Tanura site by March or April, it says.

The restart of three large crackers from scheduled and unplanned shutdowns in South Korea in December and January, together with the absence of planned maintenance, bolstered the naphtha crack to Brent to a monthly average of $99/metric ton in January, up from $73/metric ton in December and $57/metric ton in November, according to OPIS data. Even though the plant restarts reversed an earlier spot ethylene price run-up in northeast Asia, several cracker operators continue to favor minimum 75–77% paraffin grades for their second-half March and first-half April spot purchases, amid a colder-than-usual northern hemisphere winter that has hindered LPG cracking.

Robust demand and tight supply for February delivery pushed spot premiums for minimum 80% paraffin barrels toward mid-$20s/metric ton spot assessments to Japan from about parity for first-half-January delivery, but end users’ reluctance to pay hefty premiums for high-olefins-yielding barrels has grown after spot ethylene prices retreated.

In the second half of 2020, Asia received about 2 MMt of arbitrage naphtha per month from Western suppliers, according to one market source. But as much as 80% or more of the flows could be heavy-full-range naphtha from ports including Tuapse, Novorossiysk, and Kavkaz, Russia, another trader said earlier.

While Europe is structurally long and needs to export at least 700,000-800,000 metric tons/month of naphtha, availability of sought-after light naphtha from the US Gulf Coast (USGC) can fluctuate month by month, says another source. January 2021 liftings from the USGC to Asia totaled 365,300 metric tons in the latest tally, up 28% from December, but down 41% from October 2020, according to IHS Markit’s Commodities At Sea (CAS) service. Liftings in 2020 spiked above half a million metric tons in April, September, and October, but were as low as 178,000 metric tons in July, IHS Markit data show.

Naphtha shipments from the US to Asia totaled 4.5 MMt in 2020, a 40.6% surge over 2019 and the highest since data began being recorded in 2016, CAS data show.

Ongoing fractionation capacity expansion in the US should increase output of natural gasoline, which is typically blended with refinery naphtha for exports. Phillips 66 will resume construction of a 150,000-b/d fractionator in Texas in the second half of 2021, after suspending works in March 2020 due to COVID-19.

In the short term, the supply/demand fundamentals for naphtha are expected to remain sturdy, with no crackers in Japan, South Korea, or Taiwan scheduled to undergo maintenance until the second quarter of 2021, and refiners including GS Caltex, Eneos, and Bharat Petroleum will shut units as the spring turnaround season gets underway. “Right now, refinery utilization is low globally so if refiners raise runs, there will be more naphtha,” a trader says. “Even when fuel demand returns to a more or less normal level—if the Middle East and Indian exports shrink—the only way to get supplies is from the West, and US arbitrage is going to be a big moving factor,” says another.

“Structurally, we need US naphtha,” says one petrochemical maker.

OPIS is an IHS Markit company.

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