Asia deficit at 10-year low, Europe back to a surplus
Before the pandemic, the global Naphtha market normally ran a surplus. Last year, the market was balanced thanks to strong naphtha demand driven by high petrochemical margins. In 2022, petrochemical margins have turned negative as feedstock prices surge and demand weakens for downstream consumer products due to economic headwinds. As a result, steam crackers are cutting utilization rates, slashing demand for naphtha in the petrochemical sector. The near 1 million b/d of global surplus currently, as the chart below illustrates, is mainly driven by developments in Asia and Europe.
In Asia, ongoing lockdowns in China are weighing on demand across the region. China’s ethylene production in March-April slid by 4 percent from 2021, despite an 18.5 percent increase in capacity year-on-year. This implies that overall utilization rates for ethylene units in China reached a historic low of 65 percent in the past two months.
Indeed, lockdowns have significantly impacted the production, logistics, and demand of petrochemicals in the country. Due to strict zero-COVID rules, demand for naphtha as a major petrochemical feedstock is expected to remain depressed until perhaps the last quarter.
As 40 percent of Korean ethylene/PE exports normally go to China, and its inventory remains historically high, weak demand in China has pressured naphtha crackers in South Korea to lower run rates in May-June, including KPIC, LG Chem, Hanwha Total, Hyundai Chemical, and Lotte Chemical. In addition, Taiwan's Formosa will cut utilization to 80 percent in June, and Philippines' JG Summit will conduct maintenance at its 480,000-ton Batangas naphtha cracker next month. Therefore, Asia’s naphtha deficit is expected to shrink to 860,000 b/d in May from 1.5 million b/d in January. This is the smallest deficit since May 2012, according to ESAI Energy’s historical data.
In Europe, Italian chemical producer Versalis is permanently shutting down its steam cracker and aromatics units at Porto Marghera this month. Therefore, we expect naphtha demand to weaken, resulting in a surplus of naphtha in the region in the second quarter. As a result, the global oversupply has led to a widening discount of naphtha to crude in Northwest Europe at $14 per barrel at the end of last week, compared to $2.40 per barrel in April. European naphtha spreads are expected to average at $9 per barrel in May. From now through August, based on our assessment of naphtha fundamentals and our projection of Brent to rise above $120 per barrel, naphtha discounts in Europe are expected to stay wide, at perhaps over $10 per barrel. After that, a recovery in demand in Asia could help narrow naphtha’s discount to $4 per barrel in the last quarter.