Asia naphtha to lean on gasoline, aromatics for support in 2024 as poor olefins crimp demand

The Asian naphtha market would likely stay under pressure in 2024 amid squeezed olefins margins as macroeconomic headwinds hit, but healthy gasoline demand and associated demand for aromatics blendstocks will lend support to the battered petrochemical feedstock, sources and analysts said.

Naphtha margins are expected to remain in negative terrain next year as global overcapacity in downstream ethylene remained a key problem, unless significant capacity is rationalized over the next year, analysts said.

The front month Japan naphtha crack against Dubai had plunged from $2.60/b in 2021 to minus $7/b in 2022 as China's economic growth slowed, prompting a slump in demand for petrochemical products. Although the crack recovered in recent weeks to minus $4.93/b on Dec. 20, the year-to-date crack remained at minus $9-$10/b, S&P Global Commodity Insights data showed.

Analysts at S&P Global Commodity Insights forecast the crack in 2024 to hover around minus $9/b, and rising to minus $6/b in 2025.

"The light naphtha market in Asia is contingent on performance of the olefins sector. As we enter 2024, we expect fundamentals to remain largely unchanged, with the olefins sector to remain weak due to oversupply and slow downstream demand growth. In fact, limited upside is anticipated through 2025. As such, this will continue to have a negative impact on light naphtha demand in Asia," Aaron Cheong, associate director, feedstocks at S&P Global Commodity Insights said.

Despite reasonable growth in the packaging sectors, downstream oversupply remains a dominant theme for 2024, which will cap plant operations, analysts said in the December Asia naphtha monthly outlook report.

"Oversupply remains the key issue for the petrochemical markets in the short to medium term. This is anticipated to keep margins and operating rates subdued throughout 2024, and potentially into 2025... In Asia, economic run cuts are expected to remain the norm," according to the report.

Asia naphtha-fed steam crackers have largely been operating at or below 80% of capacity this year, as their downstream olefin production margins was below breakeven levels. The CFR Northeast Asia ethylene spread to CFR Japan naphtha, closely watched by olefin producers, was at $171.75/mt at the Asian close Dec. 20, bringing the year-to-date average to $203.71/mt, down from the 2022 average of $234.93/mt, S&P Global data showed. The typical breakeven spread is $250/mt for integrated producers and $300-$350/mt for non-integrated producers.

The recent crunch in olefin production margin was exacerbated by a combination of supply shocks such as shipping delays for Western arbitrage cargoes and refinery works in the Middle East, which saw market tightness for H2 December delivery into the current H1 February delivery trading cycle, sources said. The supply crunch is short term and set to ease once these events pass.

Supply was expected to lengthen moving forward, as 2023 had seen supply lengthen due to increased production from Kuwait and Oman, as well as increased uptake of commercial tank naphtha cargoes by naphtha-fed steam crackers, sources said.

Heavy naphtha to remain firm on gasoline support

Despite a bleak outlook for light naphtha, heavy naphtha will continue to draw support from the gasoline blending sector, as the Asian gasoline complex is expected to firm in 2024 on increased mobility ahead of general elections in India and Indonesia next year. Asian gasoline market likely to be supported by rising regional demand in 2024(opens in a new tab).

The Singapore reforming spread -- the difference between Singapore 92 RON gasoline and Singapore naphtha derivatives – typically hits a high in the summer driving months of July to September. The reforming spread hit a near one-year high of $34.08/b on July 24, before retreating to $15.55/b on Dec. 20, S&P Global data showed, as gasoline demand eases during winter.

Demand for aromatics such as paraxylene has dwindled in recent months but the PX outlook for 2024 remains rock steady in the run up to the summer driving season in the west. Prices for PX are expected to rebound strongly on the back of a strong pull for blending and tighter supplies in China next year, sources said.

The PX-naphtha margins have remained healthy, with the CFR Taiwan/China PX spread to CFR Japan naphtha holding above the typical breakeven level of around $280-300/mt. The year-to-date spread averaged $389.87/mt, improving from the 2022 average of $319.47/mt. The spread stood at $318.25/mt at the Dec. 20 Asian close, S&P Global data showed.

The healthy spread will continue to spur demand for heavy naphtha for aromatics production, sources said.

"Heavy naphtha remains highly sought after given the relatively healthy gasoline and aromatics markets. As such, heavy naphtha will continue to trade at a high premium to MOPJ and in our recent analysis, naphtha reforming margins to make gasoline is expected to remain profitable even when it has assumed a premium of $60/mt to MOPJ," said Aaron Cheong.

The market is also pinning hopes of recovery on planned petrochemical projects coming onstream in China next year, where heavy naphtha demand is likely to pick up, sources said.

"Overall naphtha demand is likely to pick up from such [Chinese petrochemical] projects. However, heavy naphtha is likely to receive more support rather than light naphtha. The poor olefins outlook might hinder demand," said an Asian petrochemical producer.

Yet, the support could be limited, as the majority of naphtha consumption is for light naphtha to produce olefins, sources said.