Asian naphtha participants are bracing for buying sentiment to turn bearish as the market absorbs news of the pipeline fire at Formosa Petrochemical's Mailiao refinery late Tuesday, trading sources said.
While the restart and turnaround schedules of Formosa's No. 1 and No. 3 naphtha-fed steam crackers at Mailiao remained uncertain, demand from the Taiwan refiner -- one of the biggest naphtha buyers in the region -- would remain capped or soften further in the wake of the fire, dealing a further blow to an unsteady naphtha market, industry participants said.
"Formosa is deferring [term naphtha] deliveries again," a trader said Thursday, but could not provide details on the possible deferred volumes. A Formosa source declined comment Thursday.
The last time Formosa had to defer term naphtha deliveries was in May, when the No. 1 cracker, which is able to produce 700,000 mt/year of ethylene and 350,000 mt/year of propylene, had to be shut May 12 following a fire at an LPG pipeline at the refinery complex. The shutdown saw the company defer term naphtha volumes, estimated at 500,000-600,000 mt.
"After the Formosa fire [on Tuesday], prices of naphtha will definitely be bearish, especially since the market is now in contango. Now, we are in a wait-and-see mode because we need to see the decision from the Taiwanese authorities," a trader said Thursday.
"Formosa released the news that [its No. 1] cracker was to be restarted and then there's another fire," the trade source said, adding that this will probably delay the restart of the No. 1 cracker.
The bearishness was borne out Wednesday, with the Asian naphtha market tumbling back into a contango at the close of the Asian trading session, unable to sustain a backwardated structure which had lasted all of two days.
At the close, the first-half September/first-half October CFR Japan physical cargo spread was assessed at minus $1/mt, down $1.50/mt from Tuesday. The August/September intermonth Japan paper spread also fell, registering at minus $1.25/mt, down from 25 cents/mt the day before.
Asian naphtha cracks also fell sharply from Tuesday's two-month high, settling at a one-week low of $113.58/mt, while naphtha outright prices eased back below $1,000/mt -- the benchmark CFR Japan naphtha flat price ended Wednesday at $998.75/mt, down $9.13/mt.
The fall in the Asian naphtha market follows a short stint of bullishness which had propped up naphtha prices early this week. Reverse arbitrage movements that were sending Middle East cargoes to the West as well as market expectations of higher naphtha demand from Formosa were part of the reasons behind the firmer naphtha market seen Monday and Tuesday.
But following the pipeline fire, a Formosa company source said Wednesday they had no immediate plans to buy additional naphtha cargoes, adding that the fire, that broke out at a hydrogen pipeline at the refinery, will "definitely" cause delay restart of Formosa's No. 1 steam cracker which had been scheduled for early to mid-August. But no new restart date is available as yet, with the source declining comment Thursday.
Meanwhile, the delay in restart of the No. 1 cracker may affect the turnaround schedule of the No. 3 steam cracker, as Formosa had planned to shut the No. 3 cracker for 40 days of maintenance following the restart of the No. 1 unit. It is not clear if the turnaround will be delayed, said the company source.
"If both No. 1 and No. 3 crackers are down at the same time there will definitely be a bearish note on prices," a trading source said Thursday. Formosa's No. 3 cracker is able to produce 1.3 million mt/year of ethylene and 600,000 mt/year of propylene.
