The Asia spot naphtha market is expected to become more active as fewer cargoes are likely to be imported under term contracts this year, Asian traders and petrochemical company sources said.

For 1992, Japanese companies have failed to conclude term contracts to buy naphtha from Saudi Arabia's Red Sea refineries, and they are also likely to import less from the Persian Gulf refineries, traders said. The Persian Gulf supply is still under negotiation.Last year, Japan imported about 820,000 metric tons of naphtha from the Red Sea. It also imported 3.5 million metric tons of naphtha from Ras Tanura and Jubail in the Persian Gulf.

Japanese petrochemical companies are seen reducing the share of naphtha imported under term contracts from 60 percent in 1991 to about 40 percent this year and consequently boosting spot requirements, petrochemical company sources said.

The higher spot market requirement gives end-users the flexibility to adjust imports depending on demand for plastics, these sources said.

The slowing economy in Japan has cut plastics demand from car and home appliance industries, but the economy is widely expected to recover slowly in the second half of the fiscal year (April-to-March).

Being locked into term contracts would force the petrochemical companies to import naphtha they might not need.

Also, producers are demanding prohibitively high prices for term supplies of naphtha, encouraging petrochemical companies to exchange the security of supply of a term contract for the less secure but possibly cheaper spot cargo, major oil company sources in Singapore said.

"Why pay high premiums for term supply when you can buy in the spot market?" one trader said.

Even during the Persian Gulf war, there was never any real threat to supplies of naphtha, and end-users are starting to question the necessity of paying a premium for term contract shipments, the sources said.

This increased demand for spot cargoes has led to hopes of more activity in the open-specification cost, insurance and freight in Japan's cash-forward naphtha market, the major oil company sources said.

A naphtha broker in Tokyo echoes that statement, predicting more spot sales of naphtha by the Saudi Arabian Marketing and Refining Co. These cargoes would then be used to back up positions in the cash forward market, he said.

Others are not so hopeful. A source at a European trading company in Singapore said that activity had already increased, but that trading interest is concentrated on specific, physical cargoes, not on the cash forward market.

Traders, who have committed to buy expensive term cargoes, are unlikely to try to sell these through the cash-forward market.

Rather, they will have secured an end-user to buy the supply before they even load the tanker in the Persian Gulf, Japanese petrochemical sources said.

Increased demand from South Korean petrochemical firms will tilt the balance further in favor of demand, making it even more difficult to find cargoes to cover cash-forward positions, some traders argue.

But others point to the increase in term contracts signed for open- specification cargoes as a factor that will boost activity.

Under these contracts, a seller commits to deliver naphtha cargoes that satisfy the quality requirements set down in the cost, insurance and freight in Japan's standard cash-forward contract.

This gives the seller the flexibility of delivering a whole range of naphtha, while still securing steady supply for the buyer.

A South Korean refiner, among others, has opted for this alternative to traditional ways of covering its requirements because it is cheaper, sources in Seoul said.

Both parties in these term open-specification contracts will want to hedge their positions and will, therefore, make more use of the cash forward market, some traders said.