COMMODITIES 2025: Asian naphtha prices to stay under pressure amid poor margins, new Chinese capacities

This is part of the COMMODITIES 2025 series where our reporters bring to you key themes that will drive commodities markets in 2025.

The Asian naphtha market will continue to stay under pressure in 2025 on poor downstream margins amid several new capacities in China, market participants told S&P Global Commodity Insights, adding that the market will be keenly tracking the incoming Donald Trump administration in the US for any potential impact from a change in policies.

Asia's naphtha demand is anticipated to rise as plants in China ramp up operations in the upcoming year, with Commodity Insights analysts expecting the country's naphtha imports to rise about 28.5% year over year to about 431,000 b/d in 2025.

The new Sinopec-Ineos cracker at Tianjin is currently operating at 70%-80% capacity while Shandong Yulong Petrochemical Ltd.'s 1.5 million mt/year mixed-feed cracker at Longkou is also on track to start up by early January, multiple sources told Commodity Insights.

However, the incremental supply from new cracker startups in mainland China will add to a supply overhang, the sources added.

Ethylene supply overhang

Asian ethylene is expected to remain oversupplied, with 2025 margins projected to track closely the subdued 2024 levels amid new capacities and slow rationalization, Commodity Insights analysts said.

Poor olefin margins are expected to persist after hitting a five-year low in 2023, with the Platts-assessed CFR Northeast Asia ethylene spread to C+F Japan naphtha averaging $203.38/mt year to date, up marginally from the 2023 average of $203.22/mt, according to Commodity Insights data, below the typical breakeven spread of $250/mt for integrated producers and $300-$350/mt for non-integrated producers.

Low olefin margins have prompted industry participants to be cautious of China's cracker run rates, which may lead to fewer imports and largely hurt trade flows from South Korea and Taiwan, with some sources warning that Asia's 2025 cracker run rates could fall below 2024 levels given the supply glut.

This comes as numerous Asia producers have been looking to rationalize capacities in recent months, especially within the ethylene value chain, and these are expected to take place at older, inefficient, and less competitive sites.

However, naphtha supply will likely tighten in Q1 2025 due to low Asia refinery runs and an increase in Middle East turnarounds during January and December, market sources said.

Macroeconomic headwinds -- especially in mainland China and Japan -- and transport fuel demand woes amid a thin-margin environment continue to place downward pressure on refinery runs, even with new Chinese refinery additions and the completion of planned maintenance in early 2025.

This is also exacerbated by China's reduction in export tax rebates from Dec. 1, limiting Chinese refinery runs, Commodity Insights analysts said in their latest Asia naphtha monthly outlook.

Naphtha supply will continue to pick up towards the end of the year, when for instance Indian Oil Corp. Ltd.'s (IOCL) Koyali and Barauni refineries are streamed to boost India's naphtha output significantly.

Meanwhile, Kuwait Petroleum Corp.'s new trading arm that is set to operate in 2025 will lead to a reduction in the availability of FOB cargoes, which would increase competitiveness within trading houses.

Reforming margins remain weak

Naphtha reforming margins are expected to stay weak through Q1 2025, with a possible upside from late Q2 2025, Commodity Insights analysts added in their outlook.

This comes after demand for naphtha as a gasoline blendstock plummeted in 2024 amid a bearish market, with the Singapore reforming spread -- the difference between Singapore 92 RON gasoline and Singapore naphtha derivatives -- hitting a near three-year low of $5.39/mt at the Asian close Oct. 29.

The spread has averaged $16.96/mt so far this year, compared with the 2023 average of $23.97/mt, Commodity Insights data showed.

Demand for aromatics like paraxylene has also plunged in 2024 on ample supply and sluggish demand, and market participants expect the PX market's recovery in 2025 to be difficult on the back of weak gasoline blending demand from the US and a struggling Chinese real estate and domestic market.

The PX-naphtha margins were unhealthy this year, with the CFR Taiwan/China PX spread to CFR Japan naphtha below the typical breakeven level of around $280-$300/mt. The spread has averaged $289.86/mt year to date, down from the 2023 average of $388.76/mt, Commodity Insights data showed.

Market sources added that 2024 premiums for heavy full range and heavy naphtha have come off sharply compared to 2023, signaling the pull into gasoline blending and aromatics has been weak.

Uncertainty ahead

With Trump set to take office in January, the market remains on the watch for new tariffs as well as the US plans to boost oil production.

Trump had promised a fracking boom that could boost crude production, which would likely lead to a decrease in oil prices, and consequentially lower naphtha prices given their close correlation.

In November, Trump had said he would impose a 10% tariff -- on top of existing ones -- on all imports from China.

Market participants are adopting a cautious approach into early 2025 amid uncertainties in US-China trade relations, although they remain on the fence on whether the proposed tariffs will eventually be imposed, or if it will act as leverage in future trade discussions.