Gasoline-led weakness that pushed Asian naphtha cracks below the $40/mt mark has had a worrying spell in the region's paraxylene market, with some traders concerned whether the price of the aromatics product might tumble, dragged lower by weakness upstream, after gaining ground in the third quarter.
CFR Japan naphtha cracks versus ICE Brent crude futures plunged to a near seven-year low after six straight falls, down at $11.98/mt Wednesday, slightly higher than the previous low on June 14, 2012, at $9.05/mt.
The Asian naphtha market has been the victim of a recent sell-off of gasoline in the West as weak Western gasoline cracks eroded requirements for blending activities, said market sources.
Naphtha cargoes have been only able to find homes by moving eastward to Asia in order for suppliers to dodge more oversupply situation.
Fundamentals are equally not strong in the Asian naphtha complex, with the region awash for some time with Western arbitrage supplies while Asia struggled to digest this oversupply.
Market sources estimated arbitrage naphtha barrels for December-arrival into the Far East at around 2 million mt, as most cargoes slated for November delivery earlier would potentially be delayed further.
Despite the continuous fall on naphtha crack spreads, a barometer typically used by a few North Asian operators to gage the economics of feeding additional heavy full range naphtha to splitter units, appetite for the high-density grade had been sluggish.
Amid a steep fall in cracking margins and a Far East supply glut, the benchmark CFR Japan naphtha marker sank to $557.13/mt Thursday, down from $577/mt Wednesday.
BEARISH PARAXYLENE
On the back of a sharp retreat in feedstock naphtha prices, the naphtha-PX spread widened $19.54/mt to $596.54/mt Thursday. The spread between naphtha and PX in Asia had risen sharply from the end of July, from an average of $343.39/mt in the second quarter to hit a multi-year high of $691.71/mt August 30 on the back of soaring PX prices amid tight spot supply, but dipped to an average of $592.42/mt month-to-date.
Most PX traders polled said the current PX-naphtha spread was unsustainable and would be under pressure to narrow as Asian PX supply/demand becomes more balanced with discussions for PX firmly crossing into January.
With several new refineries with massive paraxylene capacity expected to start up in China over the next year, Chinese PX demand could potentially drop next year, dampening Asian PX prices for 2019.
China imported more than 14 million mt of PX in 2017, estimated to rise to more than 16 million mt in 2018.
"Assuming Fuhaichuang, Zhejiang PC, Hengli, Sinopec Hainan...all start up as they have announced by 2019, I think China's imports will be reduced to 13 million mt next year," said a trader.
Some PX producers were more optimistic that the healthy spread between naphtha and PX will continue well into first half of next year, due to delays in the start-up of new PX capacity.
"Even though 14 million-15 million mt/year of new PX production capacity are projected for start up over 2018 and 2019 in Asia, we are doubtful whether so much capacity can be brought on stream within the previously announced timelines as there can be multiple delays affecting the start-up of these new plants."
