Weak Demand and Large Stocks Force Asian Cracker Operators to Reduce Production

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Researched by Industrial Info Resources (Sugar Land, Texas)--Weak demand for petrochemicals and overproduction of naphtha in the Asian region has led India's Mangalore Refinery and Petrochemicals Limited (BSE:500109) (MRPL) (Mangalore, Karnataka) to sell 30,000 tons of naphtha for the November 20-22 loading from New Mangalore at a significant discount. The company sold the naphtha to Itochu Corporation (TYO:8001) (Tokyo & Osaka, Japan) at a discount of $37 per ton in comparison to Middle East quotes on a free-on-board (FOB) basis. This is much lower than the $11 a ton FOB discount of Middle East quotes that MRPL offered for the parcel lifting in the second half of October.

MRPL has now sold 30,000 tons of naphtha for the December 14-16 loading at a discount of $19 FOB in comparison to Middle East quotes, FOB. According to traders, the lower discount offered to the buyer Vitol Netherlands B. V (Rotterdam, Netherlands) is not an indication of a market recovery since several factors play a role in deciding the price. Meanwhile, MRPL's parent company, Oil & Natural Gas Corporation Limited (BSE:500312) (ONGC) (Dehradun, Uttarakhand) has re-issued a tender to sell 35,000 tons of naphtha for the November 17-18 lifting from Hazira, Gujarat. This is because of an earlier cancellation following low bids.

Asia's declining demand for petrochemicals has made several large players in the Asian petrochemical market such as CPC Corporation (Taipei, Taiwan), Formosa Petrochemical Corporation (TPE:6505) (FPCC) (Taipei), Petroleum Corporation of Singapore (Private) Limited (Singapore), and Yeochun Naphtha Cracking Centre (YNCC) (Seoul, South Korea) postpone naphtha deliveries because of already high inventories. A few organizations have also cut back on production because of the decreasing demand. YNCC and CPC have begun using floating vessels to store overflowing stocks of naphtha, leading to long ship queues at ports and demurrage bills running into hundreds of thousands of dollars.

FPCC has decided to hold off resuming operations at the company's Number 3 ethylene cracker until the end of November. The cracker had been shut down for scheduled maintenance in early September. FPCC has had a sharp fall in profits in the third quarter because of declining prices. Asia's largest oil-refining company, China Petroleum & Chemical Corporation (NYSE:SNP) (Sinopec) (Beijing, China) plans to lower the company's crude processing rate by 10% from the peak levels of July. The company is considering further production cuts in view of the gloomy fuel demand and a large inventory.

Cracker operators in Japan were among the first to lower production rates. Sanyo Petrochemical Company Limited (Tokyo, Japan) has been running its naphtha-fed steam cracker in Mizushima at 95% of its capacity since August. Sumitomo Chemical Company Limited (TYO:4005) (Tokyo, Japan) has been running its naphtha-fed steam cracker in Chiba at 96% capacity since July. Similarly, Maruzen Petrochemical Company Limited (Tokyo, Japan) lowered its production rates to 85%.

The situation is bleak across Asia. Korea Petrochemical Industry Company (SEO:006650) (Seoul, South Korea) is considering bringing down production rates of its cracker in Ulsan by 5%. Titan Petrochemicals Group Limited (HKG:1192) (Hong Kong) has already cut back production rates of two crackers at Pasir Gudang by 20% each.

Traders do not expect the market to improve in spite of reduced production rates. Although surplus material from India and the Red Sea area is continuing to be exported to the West, there is no guarantee that the West will continue the current buying rate of 800,000 tons of naphtha per month.

Industrial Info Resources (IIR) is a marketing information service specializing in industrial process, energy and financial related markets with products and services ranging from industry news, analytics, forecasting, plant and project databases, as well as multimedia services.