How Chinese propylene demand is supporting European naphtha

Unexpected resilience in China’s propylene market in the face of macro-economic malaise has helped support naphtha demand since late-May with flexible crackers counter-seasonally favouring naphtha over propane. With still more PDH units to ramp up over the next six months, tightness in the global propane market will help prop up the otherwise soft fundamentals in the naphtha market over the same period.

The interconnectedness of the global light ends and petchem markets has never been clearer than this summer, amid the counter-seasonal incentive for flexible-feed steam crackers in Asia and then Europe, to start cracking naphtha instead of propane.

Typically summer (May- H1 September) is the off-season for propane as heating demand ends in the northern hemisphere, in turn pulling differentials versus naphtha into a deep discount thereby encouraging flexible-feed steam crackers (primarily in Asia and Europe) to maximise C3 intake (see chart below).

NWE and East Asian propane - naphtha physical differential (%)

Source: Kpler calculations based on Argus Media prices

However, this summer has been abnormal. Although loading disruptions on the USGC over H1 July due to hurricane Beryl as well as Iranian field and gas plant maintenance in June and H1 July added to tightening propane balances, the real culprit has been resilient Chinese propylene demand, which has allowed the country's PDH industry to run harder than expected, despite the rapid buildout of capacity over the past eight months.  

In H1 2024, our view remained that the varied macro-economic problems China faced (slowing domestic consumption and a weakening construction/housing industry) would continue to incentivise petchem majors in China to delay the start-ups of various units amid a chronically weak margin environment, with no fewer than three plants being technically completed in H2 2023, only for their start-ups to be pushed back into this year.

To our surprise, not only did the delayed units come online over H1 2024, but new, global PDH capacity continued to ramp up unabated while domestic propylene prices in China held steady, helping to ensure integrated complexes were marginally profitable, despite the difficulties being faced in the wider economy (see chart below).

Chinese gross PDH margins per ton of propylene and polypropylene, LHS ($/t), Chinese propylene prices, RHS ($/t)

Source: Kpler calculations using Argus Media prices

Indeed, counting the delayed ramping up of units that were completed last year, just over 4 Mt of PDH capacity has come online in China in 2024 so far, following the start-up of Zhenhua Petrochemical's 750 kt/year plant in Shandong in early August, equating to a potential increase in overall propane demand of 165 kbd if all the additional plants were to run at full rates. Moreover, one more PDH plant is expected to enter service shortly with Guoheng Chemicals' 660 kt/year plant in Fujian anticipated to begin operations by end-September (Argus), which will be able to process 26 kbd of propane if run at capacity. Even with new units forcing older, less efficient ones to lower rates or close shop altogether by the end of the year, assuming average PDH utilization rates for the year so far (around 75%), once all the fresh capacity is up and running, the y/y increase in China’s propane demand alone will equate to over 100 kbd.

Although planned PDH maintenance in China over August and September is helping to keep a lid on growing import requirements, once these units return to service over H2 September, assuming China’s propylene demand remains equally resilient next month and through Q4, flexible-feed crackers in Europe and Asia will likely continue to favour naphtha as seasonal heating demand helps propel propane consumption to record highs at a time when US LPG export terminal capacity is likely to face bottlenecks.

The surprisingly stable propylene market in China is therefore helping to counter-seasonally support naphtha demand in both Asia and Europe (see chart below) and could well do so for the rest of the year, despite ongoing weakness in the base chemical markets in OECD countries because of sticky inflation and ongoing high interest rates. Indeed, unusually strong butadiene markets in Asia since March and a mix of unplanned cracker and planned storage maintenance for ethylene on the USGC since July have been supporting steam cracker margins in recent months will likely continue to do so until H2 September, before ethylene markets lengthen again through Q4.

Northwest European gross complex steam cracking margins per ton of ethylene ($/t)*

*Complex steam cracker margins assume the facility includes integrated aromatics and butadiene extraction units

Source: Kpler calculations using Argus Media prices

Once Chinese PDH plants return from maintenance by H2 September and with a further unit set to ramp up, a bullish case is emerging for propane over Q4, especially so in Europe. The backwardated structure of the propane market in NWE through the summer has been discouraging stockpiling ahead of the heating season which typically begins in H2 October (see chart below).

NWE propane M1-M2 structure ($/t)

Source: Kpler calculations based on Argus Media prices

Additionally, from H2 November onwards, buyers in Eastern Europe will be looking to build propane inventories ahead of the EU’s ban on Russian-origin imports which comes into effect on December 18th. Russia typically rails 70 kbd of LPG into Eastern Europe (mostly Poland) and those barrels will have to be replaced by pulling in US cargoes into the ARA hub, bulk breaking them and moving the barrels East via railcars and barges. However, with US exports facing a potential bottleneck from terminal capacity limits and PDH operators in China reliant on waterborne barrels for their feedstock needs, a pricing tug-of-war is therefore likely to ensue between East Asia and NWE over late-Q4 into early 2025 with too few cargoes on the water to sate both region's demand needs - assuming a typical heating season is to occur in the northern hemisphere.

Finally, with propane prices set to remain elevated from H2 September through to Q1 2025, naphtha should price itself into the steam cracking pool over the same period with surplus n-butane molecules being drawn into the Atlantic Basin gasoline market from mid-September onward following the switch to winter specification.

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