FocusNew MEG capacities may result in pressure on Asian prices

26 May 2009 07:57  [Source: ICIS news]

By Salmon Aidan Lee

SINGAPORE (ICIS news)--The startup of new monoethylene glycol (MEG) capacities in the next 1-2 months could result in more pressure on Asian prices, as the long-touted oversupply becomes a reality and producers margins get squeezed, sources said on Tuesday.

Rabigh Refining & Petrochemical Co (Petro Rabigh) has started operations at its new 700,000 tonne/year MEG plant in Saudi Arabia earlier this month and was in the process of building up inventories, sources close to the company said.

“The first cargo of 19,200 tonnes was loaded on 18 May, and should reach Asia in about 25 days’ time,” said one of the sources.

Hot on Petro Rabigh’s heels is another 700,000 tonne/year facility by Saudi Yanbu National Petrochemical (Yansab), on the Persian Gulf coast of Saudi Arabia.

Main shareholder SABIC had projected the startup of this line as mid-2009, with sources close to the major saying “an end-June to early-July date is highly possible”.

“Actually, we’re seeing the impact of more MEG already since last year,” said an official from Zhejiang Heng Yi Polymer, a major producer of polyester filament yarn and fibres in eastern China.

He was referring to the dip in MEG values between June and December last year, as prices tumbled from a high of almost $1,200/tonne CFR (cost and freight) China at the end of June last year to December’s $460-500/tonne CFR China.

“We’d been told many times [in recent years] to watch out for an oversupply [of the MEG market], so naturally we were progressively confident that we could get supplies rather having to beg for them, like a few years back,” said an official from Zhejiang Yuan Dong, another leading polyester producer in China.

Before Rabigh and Yansab, Korea’s Honam Petrochemical, Iran’s Farsa Chemical and Taiwan’s Nan Ya Plastics started up MEG plants in the past two years which added another 1.5m tonnes/year of new capacities to the market.

“You look at the downstream market, and see how much polycondensation capacities had grown [in China], and we can conclude that new MEG capacities were starting up faster than downstream capacities,” a sales manager from a major MEG producer said.

According to 2008 statistics released by the National Reform and Development Council, Chinese polyester output was no more than 20m tonnes for the whole of last year, although nameplate capacities totalled some 22m tonnes.

“This year, we may see a total output to be roughly the same as last year, so you can say MEG is gradually going into oversupply,” added the sales manager, who is based in Shanghai.

And to the chagrin of sellers, the new capacities starting up this year would not stop at the new two Saudi units.

Eastern Petrochemical (Sharq), a joint venture between SABIC and a Japanese-owned consortium led by Mitsubishi Chemical, is expected to bring on stream its new 700,000 tonne/year plant at Al Jubail in Saudi Arabia around October.

And Shell Chemicals is aiming to startup its new 750,000 tonne/year facility in Singapore early next year. More new capacities in China, India and the Middle East could also join the ranks in 2010.

“We can see a deluge of MEG coming our way; we’re very concerned,” said a source from Polychem Indonesia, a mid-sized MEG producer.

Taking into consideration that the downstream polyester and textile industries might be seeing a full-year contraction in sales, output and profitability compared to last year, the outlook does not bode well for MEG sellers.

“Since earlier this month, we have been seeing erratic sales and generally a price fall in almost all grades of polyester products, so we’re very careful in our feedstock procurement,” said an official from South Holdings, a producer of polyester filament yarns in eastern China.

Due to a myriad of reasons ranging from a change of seasonal demand and reduced exports of made-in-China apparels owing to the global economic slowdown, Chinese polyester makers had been seeing their sales dip and margins squeezed.

“Even with this supposed peak season of summer, we’re seeing falling prices of [polyethylene terephthalate] bottle chips and demand is actually falling, so it’s difficult for us,” said an official from China Resources Packaging, a major producer of PET bottle chips in Changzhou in eastern China.

“In view of such a bleak outlook, we’d decided to cut back on production in June, maybe stop for about two weeks,” said an official from Jiangyin Hua Hong Polyester, a synthetic fibre maker in eastern China.

A trim of operating rates in the downstream sectors coinciding with the swelling of new MEG capacities could very well weigh on the prices of the fibre intermediate in the medium term, said market players.

But while regional MEG powerhouses Nan Ya and Honam are concerned with the near-term outlook, they had yet to decide whether to cut back on operating rates like the way they did last year following a margin squeeze.

“We’d just [restarted] our plant after a shutdown; we’re not offering additional cargoes for now,” said a source from the Korean company.

“The tug-of-war [between buyers and sellers] had begun,” said a trader from China’s Teracle Trading. “On one hand, we’ve sellers looking to maintain margins but not willing to cut operations yet, and on the other hand, we’ve end-users slow to commit and traders with extra cash to speculate the market.”

“We’d likely see a very interesting show unfolding in the next few months,” added the trader, who believed prices could fluctuate again after staying within the relatively narrow band of $520-580/tonne CFR China for two months.

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By: Salmon Aidan Lee
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