Naphtha markets brace for margin squeeze amid supply glut in 2024
(Reuters) - Global naphtha markets will likely suffer from lower profit margins in 2024 as refining and petrochemical capacity expansions in China and the Middle East outpace plastics demand growth globally, traders and analysts said.
This will force cracker operators to keep run rates low, while more naphtha could go into the global gasoline blending pool especially during the U.S. summer driving season and cap retail fuel prices.
Naphtha is used as a key ingredient in making petrochemicals like paints, plastics, and fibers, as well as a gasoline blendstock.
Here are the key fundamentals to watch out for in naphtha markets in 2024:
OVERSUPPLY MAY LEAD TO RATIONALIZATION
Supply growth in global naphtha markets is set to outpace demand growth by 1.88 million barrels per day (bpd) in 2024, up from 1.83 million bpd in 2023 and 460,000 bpd in 2022, according to forecasts from Energy Aspects.
Wood Mackenzie expects the global naphtha surplus to hold steady at 400,000 bpd this year.
The Asia-Pacific region is still expected to remain short of naphtha, but the deficit is set to shrink by about 17% to 1.037 million bpd, S&P Global Commodity Insights said.
In the Middle East, the Al Zour refinery in Kuwait and the Duqm plant in Oman, which started operations last year, are expected to ramp up production and boost naphtha exports to Europe and Asia in 2024.
Margins for key plastic raw materials such as polyethylene and polypropylene have underperformed in recent years, at around $150 per metric ton in the second half of 2023, below the break-even margin of about $300-$350 per ton needed for standalone plants, industry officials said.
S&P Commodity Insights' Sanjay Sharma said there will be some rationalization of petrochemical plants in South Korea, Japan and China the next two to three years if demand doesn't recover.
"Chinese assets which are coal-based, and are small in size are under threat," he said.
EUROPEAN SUPPLY
Continued Russian exports will depress naphtha profits in Asia, analysts said.
Moscow pivoted the bulk of its naphtha exports to Asia following western embargoes. The shipments rose to a record of about 278,000 bpd in 2023, ship-tracking data from Kpler showed.
Shipping attacks in the Red Sea have sparked concerns of disruptions in European naphtha supply to Asia and have supported Asian refiners' margins in January but traders said this could be a temporary tailwind amid ample supply.
SLOW DEMAND RECOVERY
Although petrochemical demand is expected to recover slightly from 2023 levels, high inventories and economic headwinds will limit consumption in the consumer goods sector, analysts said.
Shell, which produces petrochemicals such as the monoethylene glycol used in synthetic fibers at its Singapore complex, flagged impairment charges of up to $4.5 billion for the fourth quarter earlier this month, about half of which were tied to the Singapore site.
"Consumption of polyesters is expected to pick up in 2024 as global economic conditions stabilize, but the rebound in demand is not expected to be strong enough to offset the market imbalance," said Salmon Lee, global head of polyesters at Wood Mackenzie, said in a note.
"The shift to consuming more recycled polyester will be at the expense of virgin polyester."
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