Surplus supply of ethylene in Northeast Asia is likely to swell further in the coming months as Asian steam cracker operators shrug off the narrowing spread to naphtha and keep operating at high rates.
They are reluctant to cut operating rates amid the wide spread between other olefins and naphtha, especially propylene.
The premium for CFR Northeast Asia ethylene to benchmark CFR Japan naphtha physical plunged to a five-year low of $288.875/mt on Tuesday. It was still at $290.875/mt on Wednesday.
Lately, a handful of cracker operators in Asia put the breakeven level for the ethylene-naphtha spread around $200-$250/mt, adding that the $350/mt mark was applicable to crackers operating on old and dated technology. The polyethylene-naphtha spread should be the barometer for integrated chain producers, sources said.
"For a run cut, ethylene price should go down further," an ethylene producer in South Korea said.
"The propylene-naphtha spread is still healthy. Overall steam cracker profits are still positive," a steam cracker operator in Taiwan said.
The price spread between propylene and naphtha was calculated at $415.88/mt on October 31, up $2/mt on the day, S&P Global Platts data showed.
ETHYLENE FALLS BY $470/MT IN 3 MONTHS
Olefins producers in East Asia have been enjoying lower feedstock costs due to the abundance of paraffinic naphtha, a light distillate oil grade that is predominantly used in steam crackers, due to arbitrage cargoes arriving from the West.
Cash differentials for light paraffinic naphtha physical cargoes on a CFR Japan basis hit a 15-month low of minus $3.50/mt on October 15, before inching up marginally to minus $2.50/mt on Wednesday.
With Asian steam cracker operators operating their units at full capacity, some even beyond 100%, the region has been awash with ethylene supply.
The Asian ethylene market is also under pressure due to an influx of Middle Eastern cargoes where maintenance at downstream plants led to a surplus of ethylene supply.
On Tuesday, CFR Northeast Asia ethylene was assessed at $930/mt, the lowest level since February 18, 2016, when it was assessed at $920/mt, Platts data showed.
Asian ethylene has fallen by $470/mt since mid-July when the price was $1,400/mt, Platts data showed.
DERIVATIVES MARGINS RISE
The recent decline in ethylene prices pushed up the production margins for ethylene derivatives. The Asian PE production margin was at a three-year high at plus $150/mt on October 30, according to Platts data.
The price spread between PE and ethylene was calculated at $300/mt Wednesday, higher than the breakeven spread of $150/mt, Platts data showed. Asian monoethylene glycol margin was calculated at an eight-month high of plus $102/mt on October 31, Platts data showed.
"I am now in the market, looking for a spot ethylene cargo. It is a good price to buy for PE production," a Southeast Asian PE maker said.
Integrated PE producers in Southeast Asia also preferred to keep operating rates high due to positive PE margins.
"We still hope to provide polymers to downstream plants. I believe others like us will do the same," a Southeast Asian producer said.
Most ethylene end-users in Southeast Asia were still reluctant to buy spot cargoes for stock building as the outlook for ethylene derivatives is not bullish.
Recent moves by PE suppliers in the US to send cargoes to Southeast Asia due to US-China trade war have hurt business in the region, according to industry sources.
NAPHTHA STILL THE WINNER
Naphtha yields a balanced composite of ethylene, propylene and butadiene compared with rival gas feedstocks such as ethane or propane.
Cracking of light feedstocks such as ethane or propane push down propylene and butadiene yields. Ethane cracking pushes down propylene production yield to 0.03 from 0.13 when naphtha is used, according to industry sources.
Butadiene production suffers most by light feed cracking as butadiene production yield goes down to 0.01 compared with 0.04 from naphtha cracking.
In the environment of an ethylene-overhang, naphtha as a feedstock diversifies olefins producers' risk.
Additionally, Southeast Asian olefins producers are eyeing an expansion of naphtha-fed steam cracker capacity with a handful of construction projects already in the pipeline, particularly in North Asia.
Benchmark CFR Japan naphtha physical stood at $639.125/mt Wednesday, up $2/mt on the day.
