Global LPG and naphtha markets have won a reprieve from oversupply, putting off the ‘race to the bottom’ between LPG and naphtha until the end of this year or perhaps even early 2020. Even as the strong Q1 19 pre-election demand from India and Indonesia ebbs, the start-up of new Chinese petrochemical capacity amid US Gulf Coast shipping delays have continued to tighten Asian markets. Asian LPG imports reached 2.1 mb/d in Q1 19, higher by 0.11 mb/d y/y, according to Kpler data, and imports are likely to continue higher in the near term. Now new factors have emerged to support the market.
The US’s non-renewal of Iranian sanctions waivers will cut OPEC NGL production by another 0.3 mb/d y/y in 2019 to 5.5 mb/d. The subsequent decline in Iranian cargoes will mean countries such as Indonesia and India will be looking for alternative suppliers. So far, the US has made up the shortfall in terms of LPG. But naphtha stands to receive more support than LPG from the Iran cuts, and now will also be boosted by the contaminated Russian crude situation, which could curtail European and Russian refinery runs. Large buyers of Iran’s South Pars Condensate (mainly Japan and South Korea) will be casting about for alternative supplies, including heavy naphtha. Now they will be joined by customers in Europe also in the hunt for alternative heavy naphtha suppliers.
Standing in the way of a more constructive picture for LPG and naphtha are waning Asian petrochemical margins, which are now at levels last seen 12-18 months ago. Having recovered from the collapse in crude prices in Q4 18, margins have since been felled by weaker demand in Q1 19 and the onrush of new petrochemical capacity, the bulk of which is expected to hit in the latter part of the year. In olefins, 23.32 Mtpy of new global ethylene production capacity is expected to start up in 2019–20, with 11.13 Mtpy (47.7%) located in Asia. Downstream, about 11.4 Mtpy of new global polyethylene capacity is targeted for end-2020, with nearly 3 Mtpy of new PE in North America alone.
Already, petrochemical producers are waving red flags about further weakness. JXTG said in late April it would cut para-xylene production rates by 10-20% (0.36-0.72 Mtpy) as soon as possible. LyondellBasell reported a 34% y/y drop in its Q1 19 net income due to slimmer global ethylene and polymers margins. It is hard to imagine that LPG and naphtha can remain well supported structurally, even in the face of supply cutbacks, if downstream prices continue to falter.
Past the noise of Asian election season, the challenge will then revolve around the region’s longer-term demand story—petrochemical margins. These are now in perilous territory even as their effects are being masked by ongoing adjustments to rapidly changing LPG and naphtha trade flows. Should softness along that value chain persist, or even worsen amid significant new capacity additions in H2 19, it is not out of the question for the market to enter a period of rationalisation and rebalancing, where lower cracker operating rates—among other measures— are implemented. Should this occur just as the US attempts to export record LPG volumes in H2 19 and the IMO effect—where the global light crude slate results in an overproduction of light ends—takes hold, the delayed race to the bottom could indeed begin.