FocusAsia MEG, DEG crash on panic-selling amid high China inventory

28 February 2013 06:58  [Source: ICIS news]

By Becky Zhang

Polyester is the main downstream of monoethylene glycol.SINGAPORE (ICIS)--Spot prices of monoethylene glycol (MEG) and diethylene glycol (DEG) in Asia tumbled by as much as 8% this week on panic-selling upon release of data showing that manufacturing activities in the key China market has slowed down, industry sources said on Thursday.

The downtrend may continue as China is overflowing with inventory, with demand in major downstream polyester sector still in doldrums, they said.

On 27 February, MEG prices closed at $1,065-1,088/tonne (€809-827/tonne) CFR (cost and freight) CMP, down by $52-70/tonne or 5-6% from two days ago, while DEG was at $1,100-1,125/tonne CFR CMP, lower by $75-90/tonne or 6-8% over the same period, according to ICIS.

An unwelcome news greeted the market at the start of the week, as UK investment bank HSBC released its flash February purchasing managers’ index (PMI) for China that showed a lower reading of 50.4 – a four-month low. The PMI is a barometer of an economy’s manufacturing activities. A reading above 50 indicates expansion, while a reading below 50 means contraction.

Sharp falls in crude prices on concerns over the eurozone following Italy’s inconclusive elections compounded the pressure on the Asian MEG and DEG markets this week, market sources said.

Political uncertainties in Italy spooked the equities and energy markets on worries that they could destabilise the eurozone and derail the region’s progress in addressing its mounting debts, market sources said.

The extent of the recent MEG and DEG price falls, however, caught most market players off guard.

“We are keen to sell our cargoes that are arriving soon because of tight storage tank spaces, and we worried that the downtrend will continue for some time given the poor macroeconomic situation,” a major Chinese trader said.

Most traders in China have stocked up on inventories ahead of the Lunar New Year holiday on hopes of better demand in the second quarter, when manufacturing activities in the country usually peak.

MEG inventory at China ports is approaching a record high of 900,000 tonnes this week, up by 140,000 tonnes from two weeks ago – before the Chinese Lunar New Year, which was celebrated on 9-15 February. In late April 2012, inventory went up to as high as 870,000 tonnes amid slow demand, but the average for last year was 730,000 tonnes.

For DEG, inventory at Chinese ports has ballooned to 110,000 tonnes this week, up by 20,000-25,000 tonnes from the start of the month and much higher than what is considered as healthy, industry sources said. The ports should just have 60,000-70,000 tonnes of DEG stocks at any given time, they said.

“Most traders [have a] bearish outlook this week and were in a rush to offload their inventories, which led to the rapid downtrend [in prices],” a regional market player said.

Offers are outnumbering bids in the market this week, observed an MEG broker, indicating that the price downtrend could continue.

“Buyers were mostly cautious and would like to wait for a couple of days until prices stabilize,” the broker said.

On the other hand, sellers that are currently saddled with high inventory continued to push for sales.

Ethylene glycol stocks are piling up because demand has remained weak.

Downstream polyester plants in China are running at an average reduced capacity of 55-70%, given a low sales-to-ouput ratio for polyester yarn and fibre producers of 30-50% in the second half of February, after the Lunar New Year holiday, industry sources said.

Polyester is the main downstream of MEG as unsaturated polyester resin (UPR) is for DEG.

UPR factories in China are operating at around 40% of capacity, industry sources said.

“The recovery of demand is slow. It is within most people’s expectations,” a major polyester maker said, adding that demand typically recovers a month  after the week-long Chinese New Year holiday.

($1 = €0.76)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By: Becky Zhang
+65 6780 4359

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