Naphtha cracks rally on demand for synthetic rubber

London (Quantum Commodity Intelligence) – Global refining margins for naphtha have risen over the past three months as the price for natural rubber has jumped 10%, creating an incentive for petrochemical crackers to process naphtha over LPG.

Asian cracks on a metric tonne basis for the front month hit their highest level since mid-March on Monday at $104/mt FOB Singapore.

And European refining margins for naphtha in June hit a near 3-month high of -$1.55/barrel Monday afternoon, with July and August tracking it higher, according to Quantum data.

The rise comes amid a shortage of the petrochemical butadiene and a consequent shift towards naphtha in crackers for its superior yield of the product.

Butadiene is a product used chiefly to make artificial rubber, known as styrene-butadiene rubber, or SBR.

"Although on paper LPG is just as profitable as naphtha, a few people are switching back to naphtha because of butadiene," said a market source.

"Butadiene is expected to get even tighter over the next couple of months...some buyers are starting to drop LPG and swap for naphtha starting now [and] over the next couple of months," the source added.

While alternate petrochemical steam cracker feedstock LPG has seen its discount to naphtha fall, which provides some incentive to switch to naphtha as it produces better yields of heavier, generally more valuable products, the main reason for the push has been buoyant butadiene prices, said the source.

Butadiene has been heard moving into the US and Asia-bound LPG cargoes were reported cancelled, leading to a double-incentive for producers there to make the switch.

However, bearish fundamentals are on the horizon, as butadiene production is likely to pick up as a series of planned and unplanned maintenances across Europe and Asia end.

Iran talks will also be keenly watched in the petchem industry, not only for its impact on crude prices, but also for the potential for a huge amount of condensate to hit the market.

Condensate is typically made from natural gas and can be substituted for naphtha into naphtha splitters, albeit with a slightly different product yield.

"As soon as the news comes that waivers will be lifted...its' going to be massively bearish...Iran has so much of this stuff waiting on the water," said the source.