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TOKYO/SINGAPORE, Jan 13 (Reuters) - Japanese trading house Sojitz Corp <2768.T> will gradually scale down its naphtha trading business to reduce its exposure to the volatile market, a spokesman said on Tuesday, as more Japanese traders struggle to turn a profit from reselling the petrochemical feedstock.
The company has already dropped a contract to buy naphtha from Kuwait Petroleum Corp (KPC) for December 2008-November 2009 supplies [ID:nSEO115263]. Sojitz also did not renew its January-December 2009 naphtha purchase contract with South Korean refiner S-Oil. [ID:nSEO114705].
"Since it's high risk, and difficult to raise profitability, we will gradually scale down naphtha trading," said Yoshikazu Ichikawa of Sojitz's public relations department.
Another source said Sojitz will be doing only "back-to-back" business, or prompt spot trading, by year-end, instead of long term deals.
Three years ago, Mitsui & Co lost $81 million from naphtha trading, which forced it to close down its Singapore oil products trading operations.
"It is very difficult to survive in the naphtha (trading) business now, let alone make money," said an Asian trader.
Even petrochemical makers are now dropping term contracts, with Yeochun NCC, South Korea's top ethylene maker, and Honam Petrochemical backing out of Saudi Aramco's January-June 2009 contract. [ID:nSP287802].
This is because petrochemical producers are uncertain if the current firm demand from China, driven mainly by the Lunar New Year this month, could last. "In the past, term contracts are almost always being renewed, but there's a lot of uncertainty in the market now," said the same source.
South Korean petrochemical makers had ramped up their naphtha cracker runs to 90-95 percent, compared to 70-75 percent in November, to cash in on the stronger Chinese buying interest.
Crack values -- the premiums/losses obtained from refining ICE Brent into naphtha -- jumped to $94.93 a tonne on Jan 13, compared to a historical low at $189.75 on Nov. 4.
"It's like going back to the good old days," said another trader.
But like others, he expected the mood to turn after the festive season because China -- Asia's main petrochemical importer -- will continue to grapple with falling exports to the West amid the economic slowdown, while its domestic demand tapers off after the festive season. This, coupled with upcoming new petrochemical capacities in the Middle East, will send cracker runs down again, traders said. (Reporting by Osamu Tsukimori and Seng Li Peng; Editing by Ramthan Hussain)