Winter Demand Expectations to Mar Asia’s December LPG Switching Economics: OPIS Poll
Asia’s flexible crackers are expected to continue reducing their LPG intake in December, extending the downtrend seen since July, as the relative strength in prices compared to naphtha continue to weigh on the economics of switching feedstocks, according to sources and the latest OPIS monthly cracking survey.
Total LPG cracking volume for December is estimated at 289,000 metric tons. While this is a small drop from the estimated 306,000 mt in November, both sit well below the actual cracked volumes of 408,000 mt in October. The projected October tally stood at 399,000 mt.
Specifically, flexible crackers in Asia are expected to process 201,000 mt of propane and 88,000 mt of butane in December. November’s planned volume comprises an estimated 219,000 mt of propane and 87,000 mt of butane, while the actual October cracking volume stood at 288,000 mt of propane and 120,000 mt of butane.
Buying appetite for LPG to be utilized as a swing cracker feedstock has remained weak amid an uneconomical price differential between propane and naphtha. The forward December Far East-to-Japan propane-to-naphtha spread quote flipped to positive at the end of October and has remained firmly in that territory, at a premium of $33.50/mt as of Thursday, according to latest OPIS data. This far exceeds the breakeven discount threshold of around $50/mt for price-sensitive operators to switch from naphtha to LPG as feedstock.
Even crackers relying on domestic gas instead of imported gas are reducing their LPG intake in the coming month, further illustrating the poor switching economics. A Southeast Asian producer source confirmed that they will be reducing volumes for November and December, citing “high” domestic prices for LPG.
However, switching economics alone may not explain the full picture, with a handful of crackers opting for naphtha despite the unfavorable terms. A North Asian producer source said that while the propane-to-naphtha spread renders switching unfeasible on paper, the high premiums on naphtha leaves them no choice but to “consider feeding some propane”.
The cash differential to Japan naphtha quotes for CFR Japan open-specification naphtha rose to $55/mt as of Oct. 29, more than double the $23/mt at the beginning of October, and at its highest since August, according to OPIS data.
Meanwhile, Asia’s CFR Japan propane premium for a 23,000 mt cargo arriving in the first half of December rose to $95.50/mt over the December Far East propane swap on Thursday, OPIS assessed. The premium has almost doubled from $47.50/mt on Oct. 22, when first-half December cargoes started trading more actively in the physical window, according to OPIS data.
Relative Support From Winter Demand Expectations
The relative strength of LPG over naphtha increased sharply during last week, as supply woes appeared over news of Energy Transfer and Phillips 66 declaring force majeure at their Nederland and Freeport terminals, respectively, Dow Jones Energy reported last week. Market participants have expressed concerns over further tightening in Asia, particularly in butane supply, should the disruptions persist.
While LPG loadings from the two U.S. terminals showed no significant slowdown last week, according to Vortexa data, Middle Eastern supply availability has remained a concern. QatarEnergy and Kuwait Petroleum Corp. issued two sell tenders so far this week, compared with five in October and six in September, according to OPIS data. KPC was even heard to have awarded two cargoes instead of one; both heard to have been sold to Chinese importers.
Naphtha cargoes, meanwhile, have continued to flow steadily into Asia despite lingering geopolitical concerns that have lifted freight rates.
Shipping data from Vortexa shows that November naphtha arrivals from west to east of the Suez Canal were estimated at around 1.82 million mt, retreating from the October high of 2.29 million mt, but a level that is regarded by market sources as “higher than expectations.”
Naphtha loadings from the Middle East stood at around 2.89 million mt in October, recovering to almost half of pre-war levels, according to the same data.
Additionally, despite a more optimistic near-term supply outlook for LPG, expectations of seasonally strong winter demand in North Asia have lent support to LPG prices relative to naphtha, even amid the recent rout in oil prices. The premium of CFR Japan propane over the December Far East propane swap for H1 December delivery has almost reached the $100/mt mark, as earlier mentioned.
“It is very difficult for us to take some LPG volume during the winter season,” a Northeast Asia-based cracker source said, noting that the current price is way beyond their breakpoint.
Stockbuilding ahead of winter demand is already evident in the spike in LPG inflows into Japan, one of the major consumers of LPG for winter heating.
Japanese LPG imports rose 46.2% month on month to 855,300 mt in October, according to Vortexa data, as buyers began building stocks ahead of peak seasonal demand in December and January. October imports were also 27.42% higher than the average monthly volume recorded in the third quarter of this year, the same data shows.
Methodology: OPIS, part of Dow Jones Energy, collects Asia-based petrochemical companies’ feedstock consumption plans for the current and next month, as well as actual consumption in the previous month. OPIS contacts feedstock procurement officers for the survey by phone, email or messages in the last week of the previous month or the first week of the current month. OPIS may use proxy data based on the best market information available for minor missing entries due to non-response by a stipulated deadline. Such proxies should not alter the overall trend or deviate from the general behaviors of most participants.
–Reporting by Chek Hoe Tan, chekhoe.tan@dowjones.com; Yiwen Ju,
yiwen.ju@dowjones.com; and Cheryl Lee, cheryl.lee@dowjones.com ; Editing by
Mei-Hwen Wong, mei-hwen.wong@dowjones.com