January 23, 2017 / 9:16 AM / 2 years ago

Naphtha surges as cold Asia weather pulls LPG to heating

* LPG loses appeal for ethylene makers as winter drives up price

* Buyers on naphtha spree to fill spot LPG void

* Demand, tight supply, no alternatives perfect for a bull-run

By Seng Li Peng

SINGAPORE, Jan 23 (Reuters) - Asia’s naphtha demand has surged since late 2016 as petrochemical makers are turning to the product after supplies of cheaper alternative liquefied petroleum gas (LPG) were consumed by heating demand amid cold regional weather.

Prices for naphtha spot cargoes for sale to South Korea flipped to premiums on Jan. 6 for the first time since November because of the higher demand.

Spot premiums hit a near 21-month high on Jan. 19 as Lotte Chemical paid $6 to $7 a tonne to Japan quotes on a cost-and-freight basis, said two traders that participate in the market.

Asia petrochemical producers had been using LPG to swap out a portion, typically between 5 to 15 percent, of the naphtha that is normally used as a feedstock to make products such as ethylene and propylene.

However, LPG is more commonly used as a heating and cooking fuel for Asia and, as temperatures in the region have plunged to colder-than-normal levels, the fuel has gone to meet heating demand.

“The majority of the demand we have now is from the heating sector in a North Asian country,” said a Singapore-based trader. “Given the high LPG price now, LPG sellers cannot sell the fuel to naphtha crackers. It’s too expensive,”

Some naphtha cracker operators who have LPG term barrels resold their barrels to their suppliers to cash in on the strong LPG prices and filled the void with naphtha instead, the two traders said.

Typically, Asian ethylene makers will make the partial switch to LPG from naphtha provided LPG is about 93 percent of the naphtha price or at least $50 a tonne cheaper than naphtha.

However, propane and butane for second-half February delivery were at about $522 a tonne and nearly $566 a tonne against prompt Asian naphtha at $517, data from brokerage Ginga showed on Jan. 20.

“The current LPG price level is unexpected,” said Ong Han Wee of energy consulting firm FGE. “The spike has been caused by short-term shortages.”

Ong sees the current LPG demand is coming largely from North China, Japan and South Korea for heating but a delay in cargoes loading from Texas in the last two weeks due to fog had affected the market supplies as well.

Asia’s naphtha strength could last at least another month as the switching away from LPG is occurring at the same time less naphtha is set to arrive from Europe.

Asia is set to receive around 900,000 tonnes of naphtha from Western Europe and the Mediterranean in February, based on a survey of five traders in the market.

That is about 31 percent less than the volumes reported in the survey for January and down from the 2016 monthly average of 1.2 million tonnes. (Reporting by Seng Li Peng; Editing by Christian Schmollinger)

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