Europe to Asia Naphtha Halts on Weaker Demand: Energy Markets

Europe to Asia Naphtha Halts on Weaker Demand
Formosa Plastics Group's No. 6 naphtha cracker plant stands in Mailiao, Yunlin County, Taiwan. Photographer: Maurice Tsai/Bloomberg News

Asian petrochemical companies may import little or no naphtha from Europe for a second month in August amid ample supplies and weak demand in Japan.

There may be no shipments of the oil product, used to make petrochemicals and gasoline, in August according to the median estimate in a Bloomberg survey of four Europe-based traders, who declined to be identified as they aren’t authorized to speak about transactions. The dearth of cargoes compares with 300,000 metric tons in June and 500,000 tons in May.

“Asian demand growth is slowing considerably,” David Wech, head of research at Vienna-based consultants JBC Energy, said by phone Aug. 4. “New refining capacity in China and ethane-based petrochemical capacity in the Middle East are also denting naphtha requirements,” he said.

Japan’s domestic naphtha demand fell for the fifth consecutive month in June, while imports in the same period dropped to the lowest level in two months, data from the Ministry of Economy, Trade and Industry showed. The exporter of petrochemicals is seeing demand fall as China, the world’s biggest energy consumer, increases domestic production.

Front-month August naphtha was at $75.40 a barrel in Singapore, 20 cents cheaper than the next month September contract, according to Bloomberg data. The six-week contango is the longest sustained period since November 2008 when it lasted for about six months.

A market in which contracts are more expensive for later delivery than earlier shipments is described as being in contango. The reverse is known as backwardation.

Ethylene Imports

China’s net imports of ethylene, a naphtha-based chemical used to make plastics, fell 21 percent in June, according to data from the Customs department. The nation’s refining capacity is forecast to expand more than 10 percent this year, according to the China Oil, Gas & Petrochemicals newsletter on Aug. 2.

Taiwan’s Formosa Petrochemical Corp. said last week it was seeking to defer some imports of naphtha as storage tanks are full following two accidents at its Mailiao plants. The company bought around 30,000 to 50,000 tons for September delivery, said two traders with knowledge of the purchase on Aug. 6.

The company halted its No. 1 naphtha cracker, which can make 700,000 tons per year of ethylene, on July 7 because of a fire, and its 540,000 barrel-a-day refinery on July 25 after a separate blaze at a residual desulfurization unit.

“The shutdown is likely to further deteriorate the weak sentiment, resulting in slackening demand in this current well-supplied naphtha market,” said Australia & New Zealand Banking Group Ltd. analysts led by Mark Pervan in an Aug. 3 report.

Formosa may shut its No. 2 ethylene plant by the end of September, delaying planned maintenance originally scheduled to start from Aug. 20 after the No. 1 plant was halted, company spokesman Lin Keh-yen said yesterday.

No Profit

European refiners can’t make a profit by selling cargoes to Asia as the price difference between the two regions is about $14 a ton, compared with the $30 to $35 a ton it costs to charter a tanker to carry 80,000 tons of naphtha from the continent to Japan, said the traders.

As a result, refiners are increasingly either reprocessing the naphtha into gasoline or blending small amounts into the motor fuel. The scope for doing this is also narrowing as the northern hemisphere enters the end of the driving season which typically ends on Labor Day on Sept. 6 in the U.S., the largest market for the fuel, the traders said.

“There is massive pressure on European naphtha and gasoline margins,” Wech said. “There is no other solution but to cut runs in the Atlantic Basin.”

Ample Supplies

Gasoline’s premium to naphtha in northwest Europe narrowed 50 percent to $39 a ton, down from $78 on July 19, according to data compiled by Bloomberg. The naphtha crack, a measure of refining profit, was at a discount of $3.30 a barrel to Brent crude for September compared with 65 cents on May 20.

European front-month naphtha swaps have been in contango since the beginning of July, implying ample supplies. The September swap is trading at a discount of $3.99 a ton to October, from $2.86 at the end of July.

Naphtha stockpiles in independent storage in Amsterdam- Rotterdam-Antwerp, Europe’s oil-trading hub, rose 72 percent to 62,000 tons in the seven days to Aug. 5, the biggest weekly increase since May 7, 2009, data from Netherlands-based consultant PJK International BV showed.

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