South Korea petrochemical makers, refiners turn to North African naphtha to replace Russian supplies - S&P Global Commodity Insights
South Korean petrochemical makers and refiners plan to regularly import naphtha from North Africa throughout 2023 as Asia's fourth biggest economy completely shuns purchasing crude and oil products from Russia, though the downstream sector may often rely on LPG as its main feedstock amid volatile ethylene margins, market participants and industry sources said March 14-16, according to S&P Global Commodity Insights.
Iran and Russia are among the world's top naphtha suppliers, but international sanctions have made it extremely difficult for South Korean downstream companies to procure light distillates from them. South Korean petrochemical players are putting in a lot of effort to diversify their feedstock naphtha supply sources and they plan to increase shipments from North African suppliers such as Algeria and Tunisia, an official at the Korea Petrochemical Industry Association told S&P Global Commodity Insights.
South Korea is Asia's biggest naphtha importer and typically received around 50 million barrels/year of naphtha from Russia prior to the Russia-Ukraine events. Its shipments of Russian naphtha tumbled 72% to 16 million barrels last year from 57.6 million barrels in 2021, according to latest data from the KPIA and Korea National Oil Corp.
Local refiners and petrochemical firms have indicated they have little to no interest in purchasing crude oil and naphtha from Russia in 2023 and shipments of oil products from the non-OPEC producer have stopped since July 2022, the data showed. South Korea usually imports a well-balanced mix of both lighter grade cracker-feed naphtha and heavy full-range naphtha from Russia but has decided it is best to simply avoid all legal, price and logistics complications by completely cutting off purchases of all petroleum products from Russia, according to feedstock management sources at Hanwha TotalEnergies, Lotte Chemical and two major South Korean refiners.
In an effort to make up for the Russian supplies, the country's refiners and petrochemical makers imported 5.3 million barrels of naphtha from Algeria in January, a record monthly high for shipments from the North African supplier after inflows averaged just 1.7 million/month over the previous three years. The country's downstream sector also received its maiden naphtha cargo from Tunisia in October 2022 and shipments from the North African nation have continued to arrive regularly since then, the KNOC data showed.
The industry would take around 500,000-1 million barrels/month from Tunisia in the first half of 2023, according to trading sources at two major South Korean petrochemical firms.
Refiners have also indicated that they would actively procure naphtha from a wide variety of supply sources including North Africa, the UAE and Qatar for gasoline blending as they prepare for the summer driving season, while those equipped with condensate splitters plan to also raise their own production of naphtha, according to refinery officials and linear programming model strategists based in Seoul, Incheon, Daesan and Ulsan.
Although South Korea's petrochemical sector is actively diversifying its naphtha supply sources, overall naphtha demand and imports could fall in 2023 as they could often switch to propane as their steam cracker feedstock in a bid to improve yields and margins that have stayed poor over the past two years, multiple sources at South Korean downstream companies including LG Chem and Lotte Chemical told S&P Global.
"Asia's ethylene-naphtha spread appears decent lately, but we are always flexible and ready to quickly shift to LPG whenever there is a need to tweak the feedstock economics strategy amid volatile market conditions," said an official at a major South Korean petrochemical maker.
The key spread between Asian ethylene and naphtha tracked by petrochemical producers has surged to a six-month high in recent days as increasing supply pressured naphtha prices lower while tight supply pushed ethylene prices higher. Platts assessed the CFR Northeast Asia ethylene-CFR Japan naphtha physical spread at $291.25/mt March 15, the highest since touching $307/mt on Sept. 19, 2022, S&P Global data showed.
Petrochemical makers may favor naphtha over LPG for the time being, but the preference could change in the second half of the year as the South Korean government plans to reinstate its 0.5% tariff on naphtha imports from July 1 from 0% currently, according to the downstream industry sources. Naphtha demand could trend lower from late in the second quarter as it is possible for LPG prices to become more competitive once the winter and early spring heating requirements fade, according to downstream industry sources. In addition, average run rates at the country's major naphtha cracking centers, or NCCs, have been gradually declining from 100% in Q4 2022 to around 80% currently due to the slowdown in the manufacturing and construction sectors that typically drive demand for various petrochemical products, industry sources said.
