Japan naphtha crack looks to remain under pressure in Q2 on thin petrochemicals margins

The C+F Japan physical naphtha crack against Brent crude is expected to remain under pressure in the second quarter after hitting a five-month low amid razor-thin petrochemicals margins, while more supply from the Middle East after refinery turnarounds have offset lower Russian naphtha inflows into Singapore, according to market sources and S&P Global Commodity Insights data.

The CFR Japan naphtha physical crack against front-month ICE June Brent crude futures fell $2.53/mt on the day and $23.30/mt on the week to a five-month low of $25.525/mt on April 9, as the bearish naphtha market could not keep pace with gains in the crude oil complex since the start of April. The crack was last weaker on Nov. 9, 2023, at $22.65/mt, S&P Global data showed.

Downstream margins for olefins production have slumped as the key CFR Northeast Asia ethylene-CFR Japan naphtha physical spread, closely watched by petrochemicals producers, was at $223.63/mt on April 9, below the typical breakeven level of $250/mt for integrated producers and $300-$350/mt for non-integrated producers, S&P Global data showed.

The thin margins would cap operating rates at Asian naphtha-fed steam crackers, sources said, adding that the previous lull in activity was due to end-users waiting for an opportune time to enter the spot market due to the bleak outlook and greater usage of LPG as a feedstock. The softer demand and greater supply from the Middle East are offsetting thinner naphtha exports from Russia to Singapore amid the drone attacks, sources said.

Asia naphtha to stay weak

S&P Global analysts expected the light naphtha market in Asia to come under pressure in the second quarter on oversupply and weak demand, while heavy naphtha markets would remain well-supported by both the gasoline and aromatics sectors, according to the latest Asia naphtha monthly outlook report April 10.

"Overall, demand for naphtha as a cracker feedstock is still expected to stay weak alongside tighter margins as downstream derivatives sector remain weighed on a lackluster economy. In addition, the start of the cracker peak maintenance season in Q2 2024 will lower steam crackers' requirement for feedstocks," the report noted.

"Asian LPG prices have remained at a wide discount to naphtha, thereby supporting increased cracking of LPG. However, the relentless surge in butadiene prices -- higher by almost 150% between July 2023 and April 2024 -- and the resilience in aromatics prices in the run-up to the peak summer driving season has helped to cushion the decline in naphtha consumption so as to produce the heavier co-products," the analysts said in the report.

Russian naphtha flows fall

Singapore's naphtha imports from Russia fell for the second consecutive quarter to 464,671 mt in the first quarter, down 37.61% on the quarter and 37.28% on the year, data from the Enterprise Singapore showed.

Singapore has been a regular importer of Russian naphtha for more than a year and imports have remained steady at an average of 579,593 mt per quarter from third-quarter 2022 to Q1 2024.

Singapore's imports of Russian naphtha hit an all-time high of 899,853 mt in Q3 2023, while no Russian naphtha imports were seen over 2018-2021.

Prior to the Russia-Ukraine war, Russian naphtha would not usually land in Singapore as the city-state normally purchases lighter grades for use in naphtha-fed steam crackers and for gasoline blending.

Given the decline in Russian spot cargo inflows into Singapore over the last quarter, offers of commercial tank cargoes for delivery into east Asia have decreased.

Platts assessed the cash differential for CFR East Asia commercial tank naphtha at $5/mt at the Asian close April 9, a discount of $5/mt to the cash differential for spot naphtha parcels on a CFR Japan basis and a discount of $3/mt to the CFR Korea cash differential, S&P Global data showed.

Meanwhile, Singapore's total reexports of naphtha, reformates and other blendstocks to north Asia, comprising China, Taiwan and South Korea, sank 27.05% on the quarter to 437,772 mt in Q1, the data showed.

Exports to South Korea and China fell 70.55% and 47.7% on the quarter to 83,035 mt and 118,340 mt, respectively. Reexports to Taiwan surged 157.43% on the quarter to 236,397 mt in Q1.

The drop in exports to South Korea came at a time when local authorities there are conducting investigations into the true origin of cargoes purchased by end-users to determine whether they could have originated from Russia.