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Asian petchem makers stick to naphtha as glut cuts demand for LPG

[SINGAPORE] Asian petrochemical makers have stuck to cheaper naphtha feedstock as a supply glut cuts the incentive to switch to liquefied petroleum gas (LPG), but the trend could reverse next year as US exports of the cleaner fuel pick up, traders said.

Buyers usually replace naphtha when LPG prices are at least US$50 cheaper than the light distillate.

But oversupply since April, caused by more European and Mediterranean naphtha cargoes into Asia, has narrowed the naphtha-to-LPG price difference, giving buyers limited incentive to switch, unlike in 2014.

Naphtha spot prices have also buckled under the weight of supplies and flipped into discounts throughout Asia since early July.

About 300,000 tonnes of naphtha may have been replaced by LPG in July in South Korea, Taiwan and Japan, a trader who tracks the LPG market said on Friday.

This was down from a peak 400,000 tonnes in June 2014 and about 350,000 tonnes in July last year, data obtained from traders showed.

The tide could however turn in 2016 as the United States starts to export more LPG to Asia, traders said.

"LPG demand for cracking has peaked in July. LPG has not been economical for crackers this year compared to naphtha and the recent strong LPG tanker freight rates have prevented US cargoes from coming to Asia," said a North Asia trader. "But the tight LPG vessel situation could ease from next year and Asia could start using more LPG in 2016 versus 2015."

The US could ship some 7.5 million tonnes of LPG to Asia next year compared with 6 million tonnes this year, provided freight rates ease, projections by consulting firm FGE show.

The US was the second largest source of LPG for China, said Suresh Sivanandam, principal analyst for refining and chemicals at Wood Mackenzie, but a lot of the propane was for Chinese propane dehydrogenation plants, which do not use naphtha as feedstock.

Naphtha imports into China, which started importing the light fuel in 2009, hit a fresh high in June at 655,169 tonnes, surpassing the previous record of nearly 560,000 tonnes in October 2014, official data showed.

Most crackers in Asia are able to replace between 5 and 15 per cent of main naphtha feedstock with LPG, a compressed mix of propane and butane that is also used for heating and transport.