Asian petrochemical makers are earning near record margins for turning naphtha into ethylene this year as low oil prices cut feedstock costs at the same time that delayed or cancelled projects keep the market undersupplied.

Asian naphtha crackers - once considered uncompetitive against US and Middle East rivals using natural gas - have seen their profits rise because of cheap oil and many are running their plants at full capacity to make ethylene.

That has not overloaded the market with the basic building block for petrochemicals as many processors held off expanding naphtha units in recent years over concerns about rising output from the US and Middle East.

Now, though, some US ethylene projects have been cancelled or delayed as the 50 per cent drop in oil prices over the past year has made shale gas less attractive as a feedstock. The delays should keep ethylene tight and Asian petrochemical margins strong for the next several years, said analysts.

“We are running both crackers at full capacity. We find no reason to lower operation rates,” said Son Jun-il, a spokesman at LG Chem, one of Asia's top five naphtha crackers, referring to two units with a combined 2.2 million tonnes per year (tpy) of capacity.

Processors in China and the Middle East are making similar decisions to delay coal-to-olefin units and their own natural gas crackers, cutting further into the mid-to-long-term supply outlook for ethylene.

With the shortage of crackers in operation, the naphtha-ethylene price gap as of July 10 was at $676 a tonne, still wider than last year's average of $556 a tonne, as naphtha prices halved over the last year to $496 a tonne on July 13.
 
The naphtha-ethylene spread has eased further from an April record of $859 a tonne, after dropping to $827 in May and $855 in June as units restarted following maintenance shutdowns.

Gee-ho Choi, an analyst at Samsung Securities, said naphtha crackers would enjoy the current boom through the end of 2017.

“South Korean chemical makers are expected to maintain earning momentums thanks to a limited capacity addition until in 2018 North American ethane crackers start to begin in full scale,” Choi said.

Naphtha is run through crackers to produce ethylene and other basic petrochemicals and fuels, which are then used to produce plastic food containers, diapers, electronics, wrapping plastics, cosmetics and paints.

Heavy Maintenance

In the first half of the year, a heavy maintenance schedule for naphtha units in Asia helped to sustain cracking margins.

South Korea, Asia's top ethylene exporter to China, will shut four crackers with a total of nearly 3.8 million tpy of ethylene capacity for maintenance this year, more than twice as much as it shut last year. The maintenance was mostly carried out in the first-half of 2015.

Taiwan's Formosa Petrochemical Corp also shut its 700,000 tpy Mailiao unit in June for maintenance.

In Japan, Sumitomo Chemical Corp and Mitsubishi Chemical each shut one of their crackers for good within the last year or so, and Asahi Kasei Corp will scrap its cracker next February.

Despite the recently improved margins for naphtha crackers, many in the sector still plan to switch to natural gas as abundant global supplies mean a cheap price outlook.

LG Chem will complete its joint venture to make 840,000 tpy of ethylene from ethane in Kazakhstan in 2019.

The US unit of South Korea's Lotte Chemical, another big Asian petrochemical maker, will set up a joint ethane cracker with Axiall in Louisiana in 2019 to produce a million tonnes a year of ethylene.

"This (US) business will help us reduce dependence on traditional feedstock naphtha ... and raise cheap gas proportion,” said a statement from Lotte Chemical. - Reuters