The decline in China's economy causes Asian naphtha prices to approach a 2.5-year low

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.

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According to Procurement Resource, the cost of naphtha, a crucial component in petrochemical production, is decreasing significantly in Asia because of reduced demand from China's sluggish economy. The supply of naphtha is on the rise due to continuous crude oil production, resulting in its price dropping to a level not seen in two and a half years.