Markets- Asian products trades under the spotlight

Apr 21 2017

In the Asian product trades, amidst the backdrop of expected fleet growth of 4% this year, this segment is likely to face a set of challenges this quarter.

Peak cracker turnaround season, the ramping up of new condensate splitters in the region, as well as petrochemical end users substituting more naphtha for LPG in the cracking pool, are expected to lower naphtha flows into Asia in 2Q17, which is the bread and butter of LR tanker demand, Ocean Freight Exchange (OFE) said.

The Asian naphtha-fed steam cracker turnaround season is expected to hit its peak this quarter, with an average of 2 mill tonnes per year of capacity likely to be offline in Japan, Singapore, South Korea and Taiwan.

A widening propane-naphtha discount and plunging butadiene prices have prompted steam crackers in the region to consider switching to LPG as petchem feedstock, with two to three end-users, including Formosa, thought to have purchased LPG for May delivery.
As new condensate splitters in South Korea and Taiwan begin ramping up utilisation rates this quarter, increased regional production of naphtha may displace some flows to Asia, resulting in less cargo movements and taking a toll on LR rates.

Hyundai Chemical’s 130,000 barrels per day condensate splitter came online in 4Q16, while trial runs at CPC’s 50,000 barrels per day condensate splitter are expected to begin in May, OFE said.

Strong blending demand for naphtha in the West, as the summer driving season approaches, has also rendered the Europe to Asia arb unworkable, diminishing demand for LRs along the key Med/Japan route.

Owners may find brief respite at the end of April when the fixing window for first half May cargoes emerges.

Heavy refinery maintenance in South Korea and Japan had the short-term effect of raising spot purchases for first half May delivery. Asian petrochemical end-users purchased at least 715,000 tonnes of spot naphtha for this delivery period, around 59% higher than that seen in the second half of April, which may help to lend some support to LR rates.

Another bright spot for LRs lies in a seasonal increase in gasoline blending demand for heavy naphtha, which has a higher yield of aromatics, OFE said.

As for the MR segment, lower cargo flows into and out of China are likely to weigh on vessel demand and thus freight rates. A widely-anticipated Chinese consumption tax imposed on mixed aromatics and light cycle oil imports is expected to take place sometime between May and July, leading to a scramble by buyers to cancel cargoes, according to Reuters. The exact date of the tax levy remains unclear.

Over January/February 2017, each month, China imported around 928,000 tonnes of mixed aromatics and 351,000 tonnes of light cycle oil on average. The impact of the tax will likely be seen in reduced imports of mixed aromatics and light cycle oil, which typically move in MRs from Southeast Asia and South Korea, respectively.

The planned Chinese consumption tax is part of a government mandate to regulate surging product exports. Increasing imports of the two blend stocks has lengthened the domestic surplus considerably, leaving refiners with no choice but to raise exports of the finished grades of gasoline and diesel in recent years.

As such, the consumption tax is likely to restrict further growth in product exports from China. Heavy refinery maintenance in China is also expected to dampen product exports in April, with 1.4 mill barrels per day of capacity offline, OFE concluded.

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