Low Mideast Gulf naphtha demand pressures clean freight

Asia-Pacific-bound clean tanker rates for naphtha shipments from the Mideast Gulf have fallen, replaced by cheaper propane feedstock and Russia-origin naphtha.

Long Range (LR) 2 and LR1 freight rates for 75,000t and 55,000t shipments from the Mideast Gulf to Japan fell by 23.3pc and 11.4pc respectively to WS115 and WS155 on 19 May from WS150 and WS175 on 12 May. Medium Range rates for 35,000t shipments from the Mideast Gulf fell by 15pc to WS195 on 19 May from WS230 on 12 May.

Demand for naphtha has diminished with alternate feedstock propane prices at a discount to naphtha values since the end of February. The shift pushed valuable tonne-mile-demand into the gas carrier segment.

Propane prices were at an average of $544/t cfr Japan on 17 May from $548/t in the previous week. Average naphtha prices were at $591/t cfr Japan compared with $594/t over the same period. Naphtha-based crackers margins extended their losses to -$76/t from -$30/t over the same period. Producers have been more inclined to feed in propane for their crackers as propane cracker margins held in positive territory at $51/t on 17 May, despite falling by $31/t from the previous week.

Most crackers in South Korea are naphtha fed, with the flexibility to take in 10-20pc of propane as an alternate feedstock. Producers such as Lotte Chemical and LG Chem since March have been on track to use propane to feed their crackers. Other northeast Asian producers such as Taiwan's Formosa are also using 10pc of propane as cracker feedstock.

Demand for naphtha from the Mideast Gulf has also been subdued in the wake of the Russian oil product ban in Europe. Russian naphtha arrivals in Asia are on track to hit a three-year high this month as cargoes continue to flood Asia.

About 1.21mn t (or 347,000 b/d) of Russia-origin naphtha has arrived or is due to arrive in Asia in May — the highest in close to three years, according to Vortexa shipping data. Figures were higher than the average monthly volume of Russian naphtha that arrived in Asia over 2020 21 before the Russia-Ukraine conflict broke out in February last year. A monthly average of 241,200 b/d of Russian naphtha arrived in Asia in 2020, while 2021's average was around 252,000 b/d.

Storage tanks in Singapore were the top destination for Russian-origin naphtha in May, receiving 173,100 b/d, or slightly more than half of the Asia-bound flows during the month. Singapore is a popular destination for the product, which is typically blended with other named-origin cargoes before it is re-exported elsewhere in Asia as a cracking feedstock. Cracker operators in Asia-Pacific — including in South Korea, Taiwan, Malaysia and the Philippines — are increasingly receptive towards the discounted supplies that emerges from these commercial tanks, propelled by weaker production margins and a bleak outlook on the regional petrochemical market. Cargoes of commercial tank origins could trade up to $20-30/t lower than those of named origins for the same delivery period.

The spike in Russia-origin naphtha supplies to Asia has satisfied demand for Mideast Gulf-origin naphtha, as consumers started to turn towards buying commercial tank naphtha as a more viable alternative with weaker petrochemical production margins. The injection of Russian supplies has given Asian naphtha supplies a consistent boost and buyers more options to choose from.

Cracker runs cut

Freight rates could remain under pressure in the short term as Japanese petrochemical producer Mitsubishi Chemical shut its 542,000 t/yr naphtha cracker in Kashima in early May because of a technical issue. Operating rates at the Kashima cracker are usually at maximum because the firm is usually short of olefins.

Demand could fall further as Shell's 1mn t/yr steam cracker located in Pulau Bukom, Singapore has suffered an issue leading it to cut its run rates, said petrochemical market participants. The cracker is likely operating at reduced rates because of upstream issues since 16 May. One of Shell's units in the Shell Energy and Chemicals Park Singapore on Pulau Bukom had experienced an operational issue, which resulted in flaring on 16 May, according to a Shell. The Shell cracker can produce up to 1mn t/yr of ethylene and 500,000 t/yr of propylene. Allocations to its downstream consumers have been affected because of reduced supplies, said Singapore-based participants.

By Sean Zhuang, Toong Shien Lee, Vanessa Liu and Andrew Khaw