Naphtha is used to produce petrochemicals and gasoline.

As refiners who make gasoline normally use the naphtha produced at their refineries as feedstock, the naphtha spot market depends mainly upon petrochemical demand to support it.

Much of the petrochemical demand is dependent upon olefin producers who supply ethylene and propylene to the plastics industry for plastic resin production.

The Asian economic crisis has resulted in severely curtailed demand for plastic and an Asian market, which is massively oversupplied.

As plastic producers cut back production to stem price slides, less olefins are needed. As less olefins are produced, less naphtha is required.

Hyundai Petrochemical, with an ethylene capacity of around one million tonnes per year, has cut back to 80 per cent. Otherssuch as Daelim Industrial Co Ltd, SK Corp (formerly Yukong Ltd) and LG Petrochemical Co Ltd have cut back by 10 to 20 per cent.Southeast Asian ethylene manufactures have also reduced operating rates.

Indonesia's sole ethylene producer, Chandra Asri, has cut its operating rate to 85 per cent due to credit concerns, while most others cut back because of poor market fundamentals.

Only a handful of Asian olefin manufacturers, such as the Petrochemical Corp of Singapore (PCS), are operating at capacity as all production is sold on a long-term contract basis.

Petrochemical producers who still have room for spot purchases, however, are commanding and getting lower and lower prices, olefin producers say. Last December Japanese end-users paid more than $180 per tonne for spot naphtha. Currently a similar naphtha cargo would command just over $130 per tonne.

Similarly, the premium on spot naphtha sold on an fob Singapore basis has shrunk from 50 cents per barrel for June lifting cargoes, to 20 cents in July andtraders project the premium for August cargoes may be flat to Singapore spot quotes due to severely depressed demand. At this point, even an increase in gasoline production seems not to have an effect on the abundant naphtha supply.

Recently, the gasoline reforming margins or the naphtha/mogas price differential widened a comfortable $5 per barrel due to shortage fears prompted by two prolonged outages at catalytic crackers in Singapore and Indonesia. The widened margins caused all four refiners in Singapore to run gasoline reformers at 100 per cent of capacity.

However, traders say the reforming margin had already narrowed to around $4.00 per barrel on the realisation that Asian gasoline demand is weak enough to mollify the effects of the two outages.