Asia’s Naphtha Crackers Hold Off Buying Despite Renewed Supply Risks
Fresh Middle East tensions sparked by hostilities in the Red Sea have dealt another blow to naphtha supplies into Asia, although many buyers are now adopting a wait-and-see approach, industry sources said on Friday.
The Iran-backed Houthi militia said on Wednesday that it had targeted two Saudi Arabian oil tankers near the Bab al-Mandab Strait, a key alternative route through which the kingdom has stepped up energy product exports to Asian buyers since the Iran war began. The attacks in the Red Sea came just as transits through the Strait of Hormuz all but halted again after a July 7 ceasefire between the US and Iran collapsed.
The paper market reacted strongly, with naphtha prices registering sharp gains in line with Brent crude’s move. The CFR Japan open specification naphtha price went on a winning streak this week, jumping to $986 per metric ton as of Thursday, a two-month high after hitting $993/mt on May 19, according to OPIS data.
The movement, however, coincided with a lukewarm response in the physical market, sources said. “The response is now a bit muted compared with the first time [of war eruption], when there was a buying rush,” a Singapore-based trader said, noting that buyers were staying cautious and waiting until the last minute to purchase.
Feedstock inventories in China are expected to last only until the end of August, while Japan has around three weeks of coverage. Still, buying sentiment remains subdued. With a swathe of Asian crackers reluctant to return to the spot market, some producers were heard to have cut operating rates in response to soaring feedstock prices, which have further squeezed ethylene production margins.
Market sources noted that Kaohsiung-based CPC Corp. has curbed operating rates to a minimum, while two foreign-invested crackers in China are expected to shut down in mid-August and September, respectively, as supply risks reemerged.
The spot production cash margin for naphtha crackers in northeast Asia has been in the red, with the loss extending to $303/mt in the week ended on July 9, deeper than the loss averaging $219/mt in the week to July 2, according to the latest data from Chemical Market Analytics by OPIS.
“It remains uncertain if it will go to the same extent as in March when many cracker units were forced to shut [due to supply disruptions],” a second Singapore-based producer source said.
“Some demand is just gone forever,” a third industry insider said.
Asian crackers previously scoured the global market for naphtha, sourcing cargoes from the U.S. and the Mediterranean to buffer against supply risks, while tightness in Asia has made it economical to move cargoes eastwards.
The August East-West naphtha spread — the price differential between CFR Japan cargoes and CIF Northwest Europe cargoes, used to gauge the viability of moving cargoes eastward — widened to $76/mt as of Thursday from the $20s/mt earlier this month, according to OPIS data. The expansion indicates growing tightness in Asia amid heightened risks surrounding the Red Sea.
Naphtha arrivals into Asia through the Bab al-Mandab Strait surged to 396,100 mt in June — the highest since January 2023, when volumes reached 446,200 mt, according to Vortexa shipping data. This came as shipments from the Middle East Gulf plunged after the war.
—Reporting by Yiwen Ju, yju@opisnet.com; Editing by Mei-Hwen Wong, mwong@opisnet.com