Naphtha Is in Short Supply
By Bai Xuesong

Naphtha is one of the important oil products. It is mainly used
in the ethylene production through steam cracking and the
aromatic extraction and also as raw material for chemical
products such as ammonia and hydrogen. With the increased demand
for polyolefins such as polyethylene and polypropylene and
aromatics such as benzene, toluene and xylene, the demand for
naphtha in the world is getting larger and larger.


1   Rapid import increase

Naphtha in China is mainly used to produce ethylene and aromatics.
Ethylene and large aromatic units in China are mostly refining
and chemical integrated complexes. They usually have the
optimized supply of raw materials from refining units. The
balance is provided within the companies from CNPC and Sinopec
Group. Small amounts are from naphtha imported from abroad.
Ethylene production in China has various raw materials. Besides
naphtha, they also include light diesel, hydrogenated cracking
tail oil and condensate collectively called chemical light oil.
According to statistics, the output of chemical light oil in
China was 26.12 million tons in 2004, including 15.5 million tons
of naphtha. The output of chemical light oil increased
considerably in 2005 and reached 30.0 million tons, including
18.5 million tons of naphtha. It was expected that the output
of chemical light oil would reach 34.5 million tons and the
output of naphtha would reach 22.2 million tons in 2006.
   Oil products in China are basically self-sufficient. Small
amounts of diesel are imported and small amounts of gasoline are
exported. As China restricts the export of gasoline, some
gasoline is exported in the name of naphtha. On the whole,
therefore, China is a net naphtha exporter. Most ethylene units
and aromatic units are constructed together with refining units.
Naphtha in most companies is therefore self-sufficient. In this
way, the dependence on outside supply is reduced and the
optimization of raw materials can be achieved. The import amount
of naphtha is therefore relatively small in recent years.
   Since 2005, the supply of naphtha in China has changed greatly.
The 900 thousand t/a ethylene unit in Shanghai Secco
Petrochemical Co., Ltd. and the 600 thousand t/a ethylene unit
in BASF-YPC Co., Ltd. started production in 2005. The 800
thousand t/a ethylene unit in CNOOC and Shell Petrochemicals Co.,
Ltd. started production in January 2006.
    The ethylene unit in Shanghai Secco Petrochemical Co., Ltd.
needs 3.0 million tons of naphtha a year. 75% of naphtha needed
will hopefully be from Sinopec Zhenhai Refining and Chemical Co.,
Ltd. and Shanghai Gaoqiao Petrochemical Co., Ltd. The remaining
25% will have to be supplied by local refineries beyond Sinopec
and CNPC or imported from abroad.
    The ethylene unit in BASF-YPC Co., Ltd. needs 2.0 million
tons of cracking raw materials a year. 80% of the total can be
from Sinopec Jinling Petrochemical Co., Ltd. The remaining 20%
will have to be purchased outside. Cracking raw materials needed
in the ethylene unit of CNOOC and Shell Petrochemicals Co., Ltd.
will totally depend on outside sources. Due to the completion
of these 3 new projects, the consumption of naphtha in China has
increased by 7.65 million tons a year and around 3.4 million tons
needs to be purchased outside. China will therefore likely
become the third largest importer of naphtha used as chemical
raw material in Asia only next to Japan and Korea.
   The import of naphtha made in China is mainly from the Middle
East and India. Kuwait sells 7.0 million tons of naphtha a year
through tendering and India exports around 3.6 million tons of
naphtha a year. Countries in the Middle East and India will
therefore become major suppliers of naphtha for China. The
import amount of naphtha in China increased rapidly in 2005 and
reached 349 thousand tons, an increase of 584.3% over 2004. In
2006, the import amount increased further and reached 552
thousand tons from January to November 2006, an increase of 329%
over the same period of 2005.


2 Sustained high price

According to the oil product pricing principle formulated by the
National Development and Reform Commission, the price of naphtha
was usually fixed at 0.85-0.94 of the ex-factory price of
gasoline. Due to the supply deficit and the inadequate linkage
of the domestic oil product price to the international market,
however, the pricing principle failed to have strict compliance.
The coefficient between the price of naphtha and the ex-factory
price of gasoline was often higher than 1.0. Starting from
January 2005, the ex-factory price of naphtha in refineries
subordinate to Sinopec Group used a new market-geared mode
linked to the international market. The ex-factory price of
naphtha this month is determined under the average Platts CIF
price in Southeast Asia in the previous month plus value-added
tax. Readjustment is made once a month. The most outstanding
difference of the new pricing standard is that the ex-factory
price of naphtha is no longer linked to the ex-factory price of
gasoline in the domestic market. It is directly linked to the
price of naphtha in the international market. This naphtha
pricing standard is basically identical to the crude oil pricing
standard. In January 2005, the ex-factory price of naphtha for
internal allocation within Sinopec Group was RMB4 020 per ton,
close to the CIF tax-inclusive price of RMB4 100 per ton in the
international market at the end of December 2004. The price of
naphtha in China is basically linked to the international market
today.
   In 2005, the price of crude oil in the international market
and the price of imported naphtha in the domestic market
increased rapidly. The highest price of naphtha in the
international market was around RMB6 000 per ton in 2005. In 2006
the price of naphtha in the domestic market has basically been
maintained at the range of RMB5 000-5 800 per ton. It increased
to RMB6 079 per ton in June 2006, came back to RMB5 389 per ton
in October 2006 and went up again in December 2006. The average
market price was around RMB5 700 per ton during December 1st-10th,
2006. Due to the supply deficit of naphtha in the Asia-Pacific
region and the rapid demand increase of naphtha in China in
recent years, the price trend of naphtha in the domestic market
will be similar to the international market. If the price of
crude oil in the international market is still maintained at
US$55-60 per barrel, the price of naphtha in the domestic market
will fluctuate at around RMB5 500 per ton.


  3   Considerable deficit in future

Judging from the execution of ethylene expansion and
construction projects, the capacity of ethylene in China will
reach 15.5 million t/a in 2010. The output of ethylene will be
around 13.8 million tons at that time, needing around 31.0
million tons of naphtha a year. According to plans for the
expansion and construction of aromatic projects already
approved, the capacity of aromatics in China will increase to
around 6.8 million t/a in 2010, needing around 14.0 million tons
of naphtha a year. The total demand for naphtha in China will
reach 45.0 million tons in 2010.
   Several construction and expansion refining projects will be
put on stream during 2006-2008 and mostly before 2008. They
include a