Asian petrochemical producers are mulling a switch from naphtha to LPG as a cracking feedstock, amid soaring naphtha prices due to a crude price rally, limited arbitrage volumes and short-covering activity in the Asian naphtha market, sources said Thursday.
In North Asia and Southeast Asia, naphtha is the primary feedstock of choice for cracker operators, but end-users switch to LPG -- which comprises propane and butane -- as a cracking alternative if the LPG price is around 90% or lower to that of naphtha, or when LPG becomes around $50/mt cheaper.
At the Asian close Wednesday, CFR Japan propane and butane prices for delivery over second-half April were assessed at $880/mt and $935/mt respectively, while H2 April naphtha was assessed at $991.50/mt CFR Japan, Platts data showed. This results in a naphtha-propane spread of $111.50/mt and a naphtha-butane price spread of $56.50/mt, which makes it more economical to crack LPG.
Depending on individual refinery configurations, petrochemical producers can swing to using LPG as 10-40% of total feedstock, in varying proportions of propane and butane. Since mid-February, Asian naphtha prices have been driven up amid spikes in Western crude benchmark prices, limited arbitrage volumes from the West and short covering activities -- creating tightness at the front of the physical naphtha curve. On February 24, 2011, the benchmark naphtha CFR Japan flatprice reached $986.88/mt -- a 29-month high -- causing buyers to defer naphtha purchases as cracking margins looked increasingly slender.
A source at Taiwan's Formosa Petrochemical said Thursday that the company will switch to using LPG as an alternative cracking feedstock over March and April, while at least two more Asian cracker operators Thursday said they were considering a switch over to using LPG.
Still, one South-Korean based source said the impact of LPG creeping into the naphtha pool should be limited due to an aggressive cracker turnaround schedule that sets in over March-May in North Asia.
"Because of the turnaround we have no interest in looking for LPG at the moment," the source said. "But we will look again at the economics at the end of April or May and maybe buy some [LPG] for June delivery," he said. Other sources, too, remained skeptical about a large-scale switch to LPG, due to fat margins for butadiene producers which currently stand around $1,300/mt, Platts data showed. The butadiene yield from naphtha is about 18% but only around 9% for LPG, thereby making the latter less attractive as a feedstock for producers wanting to maximise butadiene output.
