FocusAsia MEG up to 11-month high, uptrend likely to continue

07 August 2009 07:25  [Source: ICIS news]

By Salmon Aidan Lee

SINGAPORE (ICIS news)--Monoethylene glycol (MEG) spot prices have spiked above $700/tonne (€490/tonnes) for the first time in almost 11 months due to a strong downstream sector and supply issues from the Middle East, market sources said on Friday.

The last time MEG spot prices were above $700/tonne CFR China was in early October last year. This week, prices hit the year’s high so far at $750-760/tonne CFR China, according to ICIS pricing.

And because of a series of bullish factors, many market players said they expected the prices to rise further and edge towards $800/tonne CFR China in the coming months.

“Prices of commodities have risen sharply, alongside equities and properties, and that had to do with the economic [stimulus package] by the Chinese [government] in the past year,” said a trader now based in Shanghai, referring to the $300/tonne surge in MEG prices since March.

To some traders, the almost unabated price uptrend in the past six months was a good opportunity.

“Except for a brief time in May, and even briefer time in July, prices just keep rising almost every week,” said a trader with Kyetong International, a Korean-owned, Shanghai-based company. “I’d been buying, keeping the cargoes for a while and then selling them off at a profit, it’s been relatively easy money,” he admitted.

But besides the speculative factor behind the rally, most market watchers also agreed that the uptrend was very much based on strong fundamentals and feedstock surge.

“Prices of [feedstock ethylene] have been very high this year, and there were several months where we made losses,” said a source from Korea’s Honam Petrochemical, a leading producer of the fibre intermediate in Northeast Asia.

According to ICIS pricing, ethylene spot prices were around $1,000/tonne CFR NE Asia in October last year, squeezing margins of MEG makers.

This lasted for about two months until the tail-end of the last year, but repeated itself in July, when ethylene prices hit an eight-month high of almost $1,100/tonne CFR NE Asia.

“It was not easy to justify keeping operations high then, we’d no choice [in June] but to consider cutting back on operations,” said a source from a major regional supplier.

To most suppliers, such high feedstock costs – and the subsequent recovery of energy values to more than $70/bbl – exerted upward pressure on MEG prices.

Meanwhile, other market players noted that supply had been snug for the most of this year.

“We’d seen production problems in Saudi Arabia, Kuwait and Iran and shutdowns in other parts of the world, so it was no surprise that regular shipments were delayed persistently,” said a Macau-based trader with Grandpec International.

In fact, the supply was so tight that at least two major suppliers had been actively buying spot volumes in the past few months in order to plug contractual shortfalls, traders said.

“Very few people really know the actual supply situation in the Middle East, and the producers there also don’t like to discuss such things too much, so it’s become very much a guessing game,” said a trader with Japanese trading giant Itochu Corp.

For example, some market players believed that a new plant in Saudi Arabia had been running full since startup in June. But others said due to cracker production issues, operating rates had been erratic and there were occasional outages.

“But what we do know, based on the movements of vessels, the loading and unloading schedule at the ports, supplies from that region had been really tight,” said a Chinese trader with Shanghai Orient Holdings.

Several end-users also confirmed such a trend.

“We’ve been warned by our main [MEG] supplier that shipments would be erratic and we should prepare to buy spot volumes ourselves if we need the cargoes,” said a source from Zhejiang Tong Kun Group, a leading producer of polyester filament yarns in eastern China.

“Even though some traders said there’re lots of MEG stuffed in the storage tanks at Zhangjiagang, Jiangyin and other neighbouring ports, I think the strong demand in the downstream sector would easily absorb all these volumes and the market would remain tight,” said a Nanjing-based trader with Jiangsu Everlong Trading.

Indeed, glycols inventories in another key port area – the Ningbo area in Zhejiang in eastern China – were previously considered extremely high in April and May, but rapidly fell by the end of June after shipments became increasingly delayed.

“You look at the downstream sector, and you see how it’s been pushing up [purified terephthalic acid] prices, and you know that demand is strong,” said a Chinese trader with Zhejiang Materials Group.

In fact, most market participants believed that if nothing else, the buoyant downstream market conditions would be the single, most-important factor in pushing up prices of MEG.

“Because we have tight supply, because we have [relatively] high feedstock costs, and because we have strong demand, the only way for MEG prices, at least to me, is up,” said a Chinese trader with Xiamen International Trading.

($1 = €0.70)

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By: Salmon Aidan Lee
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