FocusAsia MEG hits 11-year high on outages

27 August 2007 05:01  [Source: ICIS news]

By Salmon Aidan Lee

SINGAPORE (ICIS news)--Asian monoethylene glycol (MEG) spot prices – which hit a 11-year high late last week – are poised to gain further for another few months as outages squeeze supply, buyers and sellers said on Monday.

Last Friday, spot MEG deals were concluded as high as $1,255/tonne CFR (cost and freight) China between traders, who were worried about the tight supply becoming even more pronounced in coming months following the outages in Saudi Arabia.

The last time MEG prices breached $1,200/tonne was in April 2005, but that was a one-off deal between speculators. Last Friday's deals above $1,200/tonne involved at least 6,000-7,000 tonnes of material and numbered no fewer than four.

The previous high was in late 1996 when prices were around $1,240/tonne for imports into northeast Asia, market veterans said. 

"This is crazy. We've not seen such bullishness for a long time, and it seems it'll continue for some time," said a Shanghai-based trader with Chemcross, a Korean company specialising in brokering and trading of petrochemicals. 

While stable demand and recent gains in feedstock ethylene and ethylene oxide costs had exerted upward pressure on prices, most market players agreed that the main reason behind the spectacular gains in the past two weeks was the outages in Saudi Arabia.

In early August, an unconfirmed explosion apparently damaged a major oxygen unit at Al Jubail in Saudi Arabia, and led to the shutdown of at least two MEG units at the site. There was also talk that a third unit was down for about a week before restarting, while two remaining ones were running at reduced levels.

The total nameplate capacity of the five MEG units was 2.67m tonnes/year. Saudi major SABIC wholly owns two of the units, while a Japanese consortium led by Mitsubishi Chemical and Mitsubishi Corp is the joint venture partner for the other three lines.

"The refusal of the producers [of the Saudi plants] to acknowledge their problems early basically provided the fuel for prices to rocket," a Shanghai trader with trading firm Teracle International said.

He was referring to SABIC’s relative silence after the outage.

The Saudi major did not declare a force majeure, and neither did it issue any statement. The Japanese consortium gave a written explanation to its customers only last week.

"Many people were confused and there were so many wild rumours. This was the perfect opportunity for traders to speculate the market," said a trader with Beijing-based Chem China. " 

Traders wasted little time in speculating the market immediately after news of the outages spread on 8 August. From $970-980/tonne in early August, MEG prices shot up to $1,090/tonne by 17 August and last Friday reached the 11-year high.

"The outage is expected to last months, and the market was already tight before this; I think prices can reach $1,400/tonne," said a Macau-based trader with Winsway International.

End-users, meanwhile, were almost totally sidelined by the rapid rise in prices. Most of them were initially sceptical of the news, given the relative silence from SABIC and its agents.

But a handful of them chose to believe by the middle of the month, and entered the spot market with purchases at $1,100-1,180/tonne.

"Basically, we're very unsure. We thought the [Saudi] problem is not too serious, and traders were just speculating the market as usual," said a procurement manager for Zhejiang Jinxing, a mid-sized polyester producer based in Shaoxing in eastern China. 

"I believed it only when I was told by [Sabic's] agent that my [MEG] shipments for September and October could be seriously delayed, but by then prices had climbed so high it was not easy to decide whether we should buy or not," said an official from Xiang Sheng Group, a mid-sized polyester producer based at Xiaoshan in Zhejiang in eastern China.

A Japanese trading house said that it was buying MEG regardless of the price, as it needed to meet contractual obligations. "I've information saying that the outage is very serious and can last for three or four months," he said.

"We understand this will be a difficult time for us," said a senior official with Zhejiang Yuan Dong, a leading polyester producer based in Shaoxing. "Prices won't be low at least for a few months, but we'll still make it through."

By: Salmon Aidan Lee
+65 6780 4359

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