Cut off from Middle East naphtha due to the Iran war, Asian producers of plastics and packaging face surging premiums that are already hitting output at petrochemical plants.
Benchmark prices for first-half May cargoes soared to around $1,300 a tonne on Monday, nearly double pre-war levels.
The rush to source naphtha sent the prompt-month spread to a record $137 a tonne in backwardation, LSEG data showed, meaning prompt prices are higher than those for future months.
A Japanese buyer recently paid a premium of more than $100 per tonne to Japan quotes for second-half April naphtha, two traders said, versus a small discount in January.
The gulf supplies 60 per cent of Asia's naphtha imports, or about four million tonnes (36 million barrels) per month while the US and Europe can typically supply about two million tonnes.
Russia fulfils roughly 14 per cent of Asia's import needs at some one to 1.2 million tonnes.
In South Korea, the industry ministry said 27,000 tonnes of Russian naphtha would arrive on Monday, the first such cargoes since an import halt in late 2022 prompted by Moscow's invasion of Ukraine.
"We are running at the lowest run rate (as) it became very hard to secure naphtha spot supply no matter the price," said an executive at Yeochun NCC, South Korea's largest ethylene producer. The company declined to comment.
About five per cent of global ethylene capacity had been shut in Japan, South Korea and China due to a lack of feedstock, JPMorgan analysts said in a March 23 note.
Global ethylene capacity is around 230 million tonnes annually.
The impact is strongest in Northeast Asia, where cracker utilisation rates fell to 60 per cent in March from about 80 per cent in February, mainly due to naphtha import dependence and limited integration between refineries and petrochemical units, said Manish Sejwal, senior vice president at consultancy Rystad Energy.
"With less access to captive supply, operators have had little choice but to cut runs," said Sejwal, who expects further run cuts of five to seven percentage points in April.
Petrochemical plants typically have operating rates below which they cannot run. Restarts, meanwhile, can take two weeks or more.
"There are challenges with going lower for sure, or stopping operations, as it will take more time to ramp up. But if feeds are not available, then what’s the option?" said Sejwal.
Naphtha is used to produce petrochemicals such as ethylene used to make goods ranging from plastics to textiles, paint, medicine and construction materials.
Middle East naphtha deliveries to Asia in March fell by about 85 per cent, preliminary data from Kpler showed, to about 583,000 tonnes from a monthly average of four million. LSEG data pegged March arrivals at around 557,000 tonnes.
April's deliveries could fall further as some March cargoes would have been en route before the war started on February 28. Adding to the squeeze, Ukrainian strikes on Russian energy infrastructure are impacting its exports.
Russian exports to Asia in March are expected to plummet to about 400,000 tonnes, down from a monthly average of one to 1.2 million, according to LSEG ship-tracking data and Russian traders.
"Even under optimistic assumptions, where global exporters maximise shipments, replacement supplies could cover only around 55 per cent to 65 per cent of the lost volumes," Rystad said.
With signs of petrochemical demand destruction emerging, there is also concern about how long the impact of the war will last.
"It will take at least three months for demand to start to stabilise even if the war ends," an official at a global commodities trading house said.
(Reporting by Mohi Narayan in New Delhi, Joyce Lee in Seoul, reporters in Moscow; editing by Florence Tan and Jason Neely)
