FEATURE: N Asian CFR naphtha term talks hampered by rising premiums.
HIGHLIGHTS
Buyers, sellers not seeing eye to eye
Upswing in current delivery cycle lifts seller price ideas
Contango in forward market decreases buyer price ideas
Market direction uncertain from coronavirus
Petrotahlil — North Asia's naphtha end-users, who have been gearing up for CFR term negotiations, are however, struggling to secure competitive offers as high cash naphtha differentials have hampered progress, market sources said.
In recent weeks, Taiwan's Formosa and South Korea's YNCC had sought CFR naphtha on a term basis, however, no cargoes were awarded, the sources said.
Formosa suspended its light naphtha term tender for delivery from August 2020 to July 2021, but remain in contractual negotiations for the supply of heavy naphtha cargoes for the same period, a company source confirmed this week.
"For Formosa nothing was awarded as there is a big gap of more than $20/mt between offer levels and proposed buying level," a trader with a petrochemical producer said.
"It is hard to make any term contract decisions as the market is quite volatile and no one wants to take the risk," the source added.
A similar scenario was reported for YNCC's October 2020 to September 2021 term requirement, market sources said.
"Term deals were not concluded because [buyer] ideas were low. YNCC's idea was a discount, but the FOB AG term cargoes were mostly at plus $20/mt, so no traders offered aggressively," a North Asia-based naphtha trader said. In May, Abu Dhabi's ADNOC, among other naphtha producers, had concluded term deals with traders for the supply of naphtha over July-December 2020 at premiums of $17-$20/mt to the ADNOC formula, on an FOB basis.
Large swings in freight also affected negotiations, as the benchmark LR1 Arab Gulf to Japan rate has tumbled from the year's extraordinarily high 455 Worldscale points on April 29 to just w70 on June 9, Platts data showed.
In late April, South Korea's KPIC had awarded its July 2020-June 2021 CFR naphtha tender to just one seller -- for four 25,000 mt parcels -- at a small discount to MOPJ naphtha assessments, CFR Onsan, as high freight had inflated offer levels, a company source said. The CFR Korea cash differentials had fallen to minus $15/mt over April 9-13, and the monthly average was minus $7.02/mt.
HIGHER PHYSICAL PREMIUMS
Cash differentials for spot paraffinic naphtha parcels against benchmark Mean of Platts Japan naphtha physical assessments, on a CFR Japan basis, averaged $4.38/mt in May, higher than 61 cents/mt in May 2019, Platts data showed. The CFR Japan cash differential was last assessed at $9.50/mt on June 9.
A related trend could be seen for cash differentials against key Mean of Platts Arab Gulf naphtha physical assessments, on an FOB basis, which averaged $15.16/mt in May, higher than the $13.04/mt in May 2019, Platts data showed. The FOB AG cash differential was last assessed at $19.50/mt on June 9.
Tight supply was reported for the current H2 July delivery cycle, as refinery run cuts, higher crude prices, and decreased arbitrage inflows from the West boosted Asian naphtha values, sources said. Traders said June-arrival Western arbitrage would total under 2 million mt, while July-arrivals were slated to be at a similar level. June-loading arbitrage fixtures from Europe total 1.56 million mt thus far, and a typical voyage to North Asia takes around 38-40 days, shipping sources said.
BEARISH OUTLOOK
However, sentiment for the longer term, is bearish as the overall uncertainty for the global economy continued to cast a shadow over trading sentiment, curbing market participants' risk appetites, sources said.
"The naphtha curve further out is in contango, so every end-user wants discounted deal levels, but no offers are in discount [to MOPJ]," a trader with a South Korean end-user said.
In the paper market, front month July/August MOPJ naphtha swap timespread was in backwardation at $1.75/mt on June 9, however, forward months were in contango with the August/September MOPJ naphtha swap timespread at minus 25 cents/mt on June 9, Platts data showed.
"[Traders] can't say how the market is going to behave as the coronavirus is still in the midst of spreading. Some countries have lifted lockdown in phases so virus cases may spike again, so end-users are [unsure] when is the right time to go in," a Singapore-based naphtha trader said.
Platts
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