Higher Asia naphtha prices hurt PX margins amid weak downstream demand

Prices for Asian naphtha will likely continue to benefit from robust buying interest and volatile crude prices, though PX producers in Asia are grappling with stunted margins amid a glut of supplies and weak downstream demand.

Firmer buying interest was seen in the Asian naphtha market toward the week ending Oct. 25, while tracking higher crude prices and despite poor downstream olefin margins.

An industry source said there is a possibility that "everyone is moving [to] H1 December more and less on H2 December," signaling a firmer buying interest for H1 December naphtha cargoes.

Similarly, the naphtha paper market also reflected firm sentiments as the front-month November-December swap time spread was up $1.25/mt on the week and was assessed by Platts at $6/mt at the Asian close on Oct. 24, S&P Global Commodity Insights data showed.

Meanwhile, olefin margins continue to be lackluster as the key CFR Northeast Asia ethylene to CFR Japan naphtha physical spread -- closely watched by petrochemicals producers -- narrowed $17.375/mt on the week to $155.125/mt at the Oct. 24 Asian close, Commodity Insights data showed. This is below the typical breakeven spread of $250/mt for integrated producers and $300-$350/mt for non-integrated producers.

Over the past week, volatile crude prices have also played a role due to simmering tensions in the Middle East, which in turn continue to affect markets with potential supply disruptions.

Tracking higher crude prices, Platts assessed the benchmark C+F Japan naphtha cargo at $679.875/mt Oct. 24, up $6.75 on the day and saw a jump of $22.25/mt from Oct. 22, Commodity Insights data showed. The front-month ICE Brent crude futures rose $0.44/b on the day, while it was up $2.2/b from Oct. 22 and was assessed at $76.03/b at the Asian close Oct. 24.

Israel launched an attack on the Syrian capital, Damascus, on Oct. 24 following a strike on a residential complex in southern Beirut, Lebanon, a day earlier and after Iran-backed group Hezbollah fired precision missiles in clashes with Israeli troops.

"Global oil supply remains stable, but the market is on edge due to uncertainty over Iranian oil flows," ANZ Research market analysts said.

PX margins struggle

As naphtha prices have remained firm, margins for PX producers are once again bearing the brunt, Commodity Insights data showed.

At the Asian close Oct. 24, the spread between CFR Taiwan/China paraxylene and CFR Japan naphtha physical was at $178.125/mt, down $2.75/mt on the day, and hovered below the typical breakeven level of $280-$300/mt, Commodity Insights data showed.

Margins enjoyed a brief revival earlier in October as PX prices rose sharply, with the PX-naphtha spread assessed at $245.38/mt Oct. 1, up from the year's lowest of $168.67/mt on Sept. 18, the data showed.

However, the joy was short-lived, and the margin rally was triggered mainly by oil price volatility rather than improved demand for PX and its downstream products within Asia, a trader in Singapore said.

"PX-naphtha [spread] is down below $200/mt, [so] not sure if you can sustain at such spreads," the trader in Singapore said.

A producer in Southeast Asia said that with such margins, a cut back in operation rates might need to be strongly considered.

"Not enough [with the] spread [around] $175/mt. We just run 80%," the producer said.

Outside of Southeast Asia, market participants were eyeing production levels by other key participants such as South Korea and Japan.

Given the ample PX available currently and stuttering buying interest seen through the year, the reduction in production seems the most viable option to support flagging spot prices, traders said.

"Regarding the low PX [margins], buyers think it's too low and expect that the PX market has potential for a rebound," a second trader in Singapore said. "But for fundamentals, no clues of getting better."