Asia's steam crackers are considering buying LPG as feedstock as soon as for July delivery to leverage positive olefins margins, hoping propane discounts deepen further after turning negative to naphtha on June 8 for the first time in 10 weeks, traders told S&P Global Platts.
South Korean petrochemical makers, Asia's biggest naphtha buyers, might switch to LPG around August, traders at the country's top chemical companies said.
"Steam crackers are starting to look at LPG as alternate feedstock, which is still not feasible economically. But based on current trends it should be in August, as it has already become cheaper than naphtha," a naphtha trader with a Southeast Asian end-user said.
LPG is deemed a viable alternate feedstock when its price is 90% or lower that of naphtha.
The Argus Far East Index propane swap spread against the Mean of Platts Japan naphtha swap stood at minus $14.25/mt at the June 12 Asian close, S&P Global Platts data showed. It flipped to a discount of $11/mt on June 8, Platts data showed.
The spread between CFR Northeast Asia ethylene and CFR Japan naphtha physical stood at $468.50/mt at the June 12 Asian close, widening $14.875/mt on the day, Platts data showed. This is well above the typical breakeven spread of $350/mt for non-integrated producers and $250/mt for integrated producers.
The use of naphtha results in lower ethylene and higher propylene production than LPG.
South Korea's Korea Petrochemical Industry Co. and Yeochun Naphtha Cracking Center typically purchase spot LPG cargoes, while Lotte Chemical and LG Chem hold LPG term contracts, sources said.
Hanwha Total recently bought a mixed propane/butane cargo for July delivery, traders said. But market sources said this purchase was not due to improving economics of LPG usage.
"We bought propane because we have a dedicated LPG cracker, not because the economics [improved]. We also thought about using LPG instead of naphtha but not for July, maybe August," a company source said.
"Recently, the ethylene and propylene margins have been really good, so the feedstock which has more ethylene yield will be better, so crackers are trying to use as much LPG as possible, then light naphtha grades," the source added.
NAPHTHA TIGHTNESS
Tight regional supply of light naphtha grades suitable for steam crackers was also prompting traders to explore using LPG, sources said.
"Currently, naphtha in the market is mostly heavy grade; people looking at LPG to crack more C2 and C3 could help balance out the market," a naphtha trader with a Southeast Asian end-user said.
Traders at South Korea's major chemical companies said as they focus on producing ethylene and propylene, they must look at the relative volume of feedstock to produce the end product, as well as prices of different feedstock.
"If we need 25,000 mt of naphtha, the amount of LPG needed is only 22,000 mt. And if we crack 40,000 mt of LPG, the naphtha usage will decrease by about 48,000 to 52,000 mt," a naphtha buyer at a South Korean refiner said.
"It will affect the [naphtha] market a lot," he said, adding while he does not see further upside to naphtha prices, seasonally lower LPG demand might dampen propane and butane prices.
During the three months naphtha was cheaper, monthly LPG cracking volumes fell 220,000 mt to 250,000 mt, he said, pointing to the volume of alternate feedstock that could be used when LPG becomes economical.
Petrochemical makers in South Korea and Taiwan are typically the first to switch feedstocks for cost advantage. However, not all steam crackers can switch easily to using more LPG. Some may require a steeper discount to make it viable, sources said.
"Koreans are seeking LPG for H2 July or whole month July delivery; I think every cracker is seeking it now, and we plan to start using it soon," a naphtha trader with a Japanese refiner said.
"Japanese crackers have less flexibility even if LPG is better than naphtha, they can only switch limited feedstock," a source with a North Asian petrochemical maker said.
FORMOSA BUYS BUTANE
The widening discount of LPG to naphtha has prompted Taiwan's Formosa Petrochemical Corp. to buy LPG for the first time since awarding a propane import tender last November for early-January delivery.
A Formosa source said the 22,000 mt butane lot for H2 July delivery - awarded on June 11 at a discount in the low $40s/mt to MOPJ naphtha - is not for cracking but for "system use, including for household users".
The butane swap was at a $25.25/mt discount to MOPJ naphtha on June 12, compared with minus $37.50/mt the previous session, Platts data showed. The deeper butane discount to naphtha compared with propane, amid a pause in imports of mixed cargoes by India and Indonesia, may prompt petrochemical makers to favor butane as feedstock, a North Asian trader said.
While Formosa continues to use term LPG as baseload cracker feedstock, it may not need to import additional spot cargoes even if the LPG discount to naphtha steepens to $40-$50/mt, the company source said.
"I am afraid [we] will not switch when under maintenance," he said. Formosa's No. 3 cracker is slated for maintenance from mid-August to end September.
