08 March 2013 09:23 [Source: ICB]
Spot prices of monoethylene glycol (MEG) and diethylene glycol (DEG) in Asia fell by as much as 8% the week ended 1 March on panic selling upon release of data showing that manufacturing activities in the key China market has slowed down, industry sources said.
The downtrend may continue as China is overflowing with inventory, with demand in the major downstream polyester sector still in the doldrums, they said.
Price falls may continue as China is overflowing with inventory
Bid-offer prices for spot MEG cargoes fell to $1,040-1,050/tonne (€790-798/tonne) CFR (cost and freight) China Main Port (CMP). An end-user secured a March MEG shipment at $1,040/tonne CFR CMP in the afternoon. Spot MEG prices have shed a total of $100/tonne the week ended 1 March.
"We are just watching the market, [and] avoiding taking positions amid the rapid falls [in prices]," a major Chinese trader said.
On 27 February, DEG was at $1,100-1,125/tonne CFR CMP, lower by $75-90/tonne or 6-8% over just two days.
CHINA EXPANSION SLOWS
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. A reading above 50 indicates expansion in the manufacturing economy, 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, market sources said.
Political uncertainties in Italy spooked 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 players off guard.
"We are keen to sell our cargoes that are arriving soon because of tight storage tank spaces, and we [worry] that the downtrend will continue for some time given the poor macroeconomic situation," a major Chinese trader said.
CHINA INVENTORIES UP
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 the week ended 1 March, up by 140,000 tonnes from 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 the week ended 1 March, 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," a regional market player said.
Offers are outnumbering bids in the market, 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 stabilise," the broker said.
On the other hand, sellers currently saddled with high inventory continued to push for sales.
Ethylene glycol (EG) 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, sources said.
Polyester is the main downstream use 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 around a month after the week-long Lunar New Year holiday.
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