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The cost of naphtha in Asia is experiencing a sharp decline and is fast approaching a low that has not been witnessed in two and a half years. This trend can be attributed to the decrease in demand triggered by the current economic downturn in China. As a result, there is now a significant oversupply of naphtha in the market.

Naphtha is a refined petroleum product that is produced alongside gasoline and diesel oil and is popularly used in the production of basic chemicals for plastics such as polyethylene and polypropylene. The price of naphtha is often used as a benchmark for many petrochemical products. Presently, there is an excess of this commodity in Asia, the market for petroleum products like gasoline remains stable, and the demand for naphtha as a downstream product is weak. However, the production of crude oil has remained the same.

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Unless the quantity of crude oil production is lowered, the naphtha supply will either remain the same or rise. Since June, the price of naphtha is falling and is worth less than the crude oil from which it is obtained. The present sluggish demand for downstream commodities in China can be attributed to a variety of factors, including the country's slow economic recovery and a decline in construction due to poor property sales. Additionally, the manufacturing purchasing managers' index fell below 50 in June for the third consecutive month, indicating poor performance in the manufacturing sector.

Furthermore, the demand for durable consumer goods is also weak, which is a major concern given that automobiles and houses are not selling well. This scenario is affecting the consumption of accompanying goods, indicating that a demand recovery within the year seems dubious.

The current sluggish demand in China is leading to an oversupply of petrochemical products throughout Asia. As per the Japan Petrochemical Industry Association, their polypropylene exports decreased by 15 percent year-on-year in May 2023. Similarly, exports of polystyrene dropped by 22 percent. The exports of these products are declining due to the poor performance of the automobile, electronics, and food industries. This situation is causing significant concern among industry stakeholders, and it remains to be seen how long it will persist.

The price of naphtha is plummeting in Asia, nearing a two-and-a-half-year low as China's economic downturn dampens demand, resulting in a serious oversupply.

The hydrocarbon's price on the Asian spot market was around $543 per tonne as of Monday. After falling to around $497 on June 28, the lowest level since January 2021, naphtha spot prices have remained in the low-$500 range.

Prices spiked to around $1,184 in March 2022, the highest since July 2008, on the sharp rise in crude oil prices caused by Russia's invasion of Ukraine.

Naphtha, along with gasoline and diesel oil, is refined from crude oil. Petrochemical companies break it down into basic chemicals for use in plastics such as polyethylene and polypropylene. The price of naphtha serves as an indicator for a wide range of petrochemical products.

Asia is seeing a glut of the commodity.

"The market for petroleum products such as gasoline is firm and the processing of crude oil has not decreased, nor has the supply of naphtha, a byproduct. However, demand for it as a downstream product is weak," commented a source at a major petrochemical company.

Unless the amount of crude oil processed is reduced, the supply of naphtha will not decrease. The price gap between crude oil and naphtha has turned negative since June, meaning naphtha is worth less than the crude oil it comes from.

A major source of the weak demand for downstream products can be found in China, where the economic recovery is sluggish and construction is slumping on poor property sales. The manufacturing purchasing managers index in June fell below 50, the dividing line between good and bad, for the third month in a row.

"Demand for durable consumer goods is weak. If automobiles and houses do not sell well, consumption of accompanying goods also suffers," said a source at a plastics maker. A recovery in demand within the year is widely seen as unlikely.

Sluggish demand in China is leading to a surplus in petrochemical products throughout Asia. Japanese exports of polypropylene, which is used in automobile parts, fell 15% year-on-year in May, while exports of polystyrene, used in home appliances and food containers, dropped 22%, according to the Japan Petrochemical Industry Association.

Japan's petrochemical industry is now focused on how the current trend will impact the price of domestic naphtha, which is based on the quarterly average of the import price. Generally, prices in the rest of Asia are reflected in domestic prices on a delay of about two months, meaning the current slump push down Japanese prices in the July-September quarter.

Although the price for the April-to-June quarter is expected to exceed the January-March price of 66,500 yen ($460) per kiloliter, "the sluggishness of naphtha prices exceeds the impact of the yen's depreciation, and domestic naphtha prices for the July-to-September quarter are on a downward trend," said petrochemical consultant Hiroki Yanagimoto.

Japan is now moving to raise prices. "The industry is facing cost burdens other than naphtha, such as high utility costs and tightening regulations on overtime hours for truck drivers," said a source at a petrochemical product processing company.  – Asian Nikkei –