Naphtha price boom expected to ease this year

Naphtha’s rally is poised to end as buyers balk at record premiums in Asia amid signs that manufacturing growth is slowing and refineries will increase supplies.

Premiums are likely to fall this year as consumption fails to keep pace with prices that have more than doubled since December, according to all five traders in a Bloomberg survey. A cargo for April delivery to Korea traded at an all-time high of about $40 a metric ton above benchmark prices last month, data compiled by Bloomberg show. February shipments sold at $17 a ton.

Demand for naphtha, an oil product used to make chemicals found in everything from plastics to antifreeze, is set to ease just as supplies recover after refinery maintenance in the Middle East and Asia. BASF SE, the world’s largest chemical company, lowered its 2013 demand-growth forecast in February, while China’s manufacturing growth unexpectedly slowed, potentially discouraging factories from stockpiling.

“People at the beginning of the year were quite positive,” said Michael Lo, an energy analyst at BNP Paribas who covers petrochemicals. “But they think it could be a bit toppy at this level. There was some refinery maintenance and demand on the naphtha side, but longer term, I don’t see that strong demand.”

Naphtha for delivery to Japan, the Asian benchmark, was at $943 a ton yesterday, little changed for 2013 and down 9.4 percent from this year’s high of $1,041 on Feb. 15, according to Bloomberg data. Brent crude is up 0.9 percent this year and down 6.9 percent from a high of $119.17 a barrel on Feb. 8.

Samsung Total Petrochemicals paid a record of about $40 more than the benchmark for a naphtha cargo for delivery to Korea in April. Yeochun NCC and LG Chem, operators of plants that turn naphtha into ethylene, the main petrochemical building block, paid about $17 a ton over Japan prices for February cargoes.

Those premiums may fall by $10 a ton from their peak in the coming months, according to one participant in the survey.

China’s factories have been increasing purchases of petrochemicals, according to a Feb. 18 report by KGI Securities, a Taipei-based consultant. That allowed Formosa Petrochemical, which operates Asia’s largest ethylene plant outside China, to boost revenue, KGI said. Taiwan’s only publicly traded refiner owns the No. 3 naphtha cracker at Mailiao, which has the capacity to make 1.2 million tons of ethylene a year.

“Restocking will slow from March to May unless China announces fiscal policy support in March,” KGI analysts Aaron Liu and Chien-an Lai said in the report.

Chinese Premier Wen Jiabao on Tuesday set an economic growth target of 7.5 percent for this year, unchanged from 2012, saying the country lacks a sustainable growth model and faces mounting “social problems.” Fourteen of China’s provinces have set lower targets for gross domestic product expansion this year compared with 2012, and the other 17 left their goals unchanged, according to Nomura Holdings.

China’s official purchasing managers’ index slipped to 50.1 in February from 50.4 in January, the National Bureau of Statistics and China Federation of Logistics and Purchasing said March 1 in Beijing. The reading compared with the median estimate of 50.5 in a Bloomberg survey of 31 economists. A number above 50 signals an increase.

BASF said Feb. 27 that demand will grow 3.5 percent in 2013. The Ludwigshafen, Germany-based company previously forecast a 4 percent gain.

While refinery maintenance has limited the supply of naphtha and supported premiums, output is forecast to rebound as fewer plants are idled, according to the Bloomberg survey.

Asian refiners will shut about 800,000 barrels a day of capacity in May, down from 1.4 million barrels in April, the most this year, analysts at Goldman Sachs Group led by Nilesh Banerjee in New York said in a report. Less than 400,000 barrels a day will be closed in June, according to the report.

Kuwait Petroleum is scheduled to finish repairs in May on plants that it shut between December and April, according to data compiled by Bloomberg. Saudi Aramco Mobil Refinery will also resume its Yanbu refinery on the Red Sea coast after shutting it for 35 days in March.

Refinery maintenance in the meantime will limit supplies and keep premiums near record highs for cargoes delivered in April, according to the Bloomberg survey.

Korean processors such as Hyundai Oilbank, S-Oil and SK Innovation are scheduled to take at least four crude distillation units offline for maintenance in March and April.

Abu Dhabi National Oil is planning to delay the start of a supply contract starting next month because of limited availability, four people with knowledge of the matter said last week, asking not to be identified because the information is confidential. The contract typically runs for a year. A marketing official declined to comment.

Naphtha demand may be limited as ethylene producers increase consumption of alternative feedstocks such as natural gas and methanol, according to Lo. Bloomberg