The crack up: Physical, paper naphtha market divergence to be tested by softer Asian petchems

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Commentary summary:

• The Asian naphtha market is showing signs of weakening, highlighted by a decrease in the East/West (E/W) spread and a drop in MOPJ cracks, indicating a potential downward trend. 

• Steam cracker margins have fallen below breakeven levels in Asian for naphtha-based units, raising concerns among operators despite healthy integrated polymers margins even as new plant start-ups loom. 

• Some steam crackers are cutting back on operating rates with a South Korean plant planning an unannounced Q4 turnaround and a Southeast Asian facility reducing rates ahead of scheduled maintenance. 

• Many arbitrage opportunities to the Far East have become unprofitable due to declining Asian cash differentials and rising freight costs. 

• Upside price risk increases in Med FOBs as major regional refiner lowers run rates, likely reshuffling trade flows and limiting send out to the Far East. 

• However, naphtha paper markets are holding strong, with MOPJ and NWE cracks at multi-year highs, driven by ongoing supply concerns as refinery run cuts pile on. 

• The key question remains when paper and physical markets will align; we that expect to occur after refinery maintenance ebbs in late October as November cargo business gets well underway. 

A capitulation of the Asian naphtha market’s recent strength is becoming apparent, as evidenced by the recent decline in the E/W spread and a slight pullback in MOPJ cracks.

Asian cash diffs have bottomed out this week after last week’s steep falls but given the lack of liquidity in the markets due to the Mid-Autumn festival holidays, we would read this as a pause in what looks set to remain a downward trajectory.

NWE/MOPJ cracks, Asian sales cash differentials. (Sparta Live Curves)

Asian naphtha-based steam cracker margins have lost about $80/mt w/w at the front—now coming in below breakevens alongside propane- and butane-fed units—and roughly $75/mt w/w through end-Q1 25, per our forward margin calculations, as flat prices rallied on pre-holiday buying while olefins values waned.

Even though integrated polymers margins remain healthy, expectations of additional petrochemical capacity starting up at year’s end is leading some operators to become more cautious.

Thus, it comes as no surprise that some steam crackers in the region are pulling back. We understand a South Korean cracker is planning a turnaround in Q4—previously unannounced in its maintenance schedule—and a southeast Asian plant is currently lowering rates, about two to three weeks prior to its scheduled works in early October.

Sparta’s Asian historical and forward steam cracker/PDH margins. (Sparta Historical Forwards)

Indeed, we are seeing an increasing number of inbound arbs to the Far East becoming unprofitable this week, largely a function of declining Asian cash diffs and rebounding freight, both of which have been our market calls for some time now.

Chiba arbs. (Sparta Global ARBS – ARBs Comparison)

Still, paper markets continue to outperform historical averages with MOPJ cracks remaining at multi-year highs and E/W spreads holding at our minimum target of $5/t above historical averages.

The backwardated structure at the front of Asian and NWE curves have steepened yet again, implying market participants remain concerned about supply.

We had warned last week that fresh announcements of refinery run cuts would rekindle these resupply anxieties and this is evident at least in the paper markets, even as the physical side gets weighed down by softer olefins and aromatics values, on top of slowing gasoline blending consumption. 

E/W November spread. (Sparta Historical Forwards)

That said, the recently announced 10% run cut from a major Med refiner has rattled a fair amount of market players. While said Med refiner was already net short naphtha, the further decline in supply could reshuffle some regional naphtha flows.

Even though our gasoline team reckons EBOB’s recovery has stalled, European naphtha-based steam cracker margins are still quite profitable (between $320-375/mt through end-Q1 25), meaning consumption from the petchems sector should remain relatively firm, albeit capped by ARA propane’s ongoing status as the most profitable cracker feedstock.

The Sparta platform continues to demonstrate a lack of urgency for inbound supplies to Rotterdam through December on the back of rising Med FOBs and sliding Rotterdam sales values.

Even so, if more Med supply opts to stay in the region, we could see more Med routes to Asia dry up, or fall deeper into the red.

Rotterdam arbs. (Sparta Global ARBS – ARBs Dashboard)

The key question in the coming weeks will be when paper and physical markets will reconcile.

In the short term, there are strong arguments for paper strength given ongoing resupply concerns.

That said, $1/bbl MOPJ cracks and positive NWE cracks seem unsustainable given waning petrochemical fundamentals and seasonally lower gasoline blending demand.

Should refinery maintenance end by end-October, we expect that reconciliation to occur once November cargo business gets well underway.

Samantha Hartke, a veteran in commodity management, boasts substantial expertise in energy analysis and product management. In her role at Energy Aspects as Head of NGLs, she analysed global natural gas liquids markets. Previously, at PetroChem Wire, Samantha provided high-quality analysis of North American NGLs and olefins. Her expertise also extends to leading the commercial and operational aspects of IHS Chemical’s daily business information service.

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