FocusAsia MEG may extend gains as market players stock up on supply

02 August 2013 05:06  [Source: ICIS news]

By Becky Zhang

Textiles are the major downstream for monoethylene glycol.SINGAPORE (ICIS)--Asia’s spot monoethylene glycol (MEG) prices have spiked 19% in July and look set to continue heading north, with traders stocking up on supply, industry sources said on Friday.

Traders are building up their inventory, anticipating prices to extend their rally, in line with the improvement in MEG market fundamentals, although some market players deem the recent gains as too steep.

On 1 August, spot MEG prices surged to a four-month high of $1,103-1,125/tonne (€838-855/tonne) CFR (cost & freight) China Main Port (CMP), after dipping to an 11-month low of $935-944/tonne CFR CMP on 27 June, according to ICIS data.

MEG inventories at China’s coastal regions declined to 830,000 tonnes in the week ended 26 July, down by 80,000 tonnes from end-June, indicating strong demand.

Demand for polyester, a major downstream for MEG, in China picked up late last month, largely on concerns that prices of the product will increase in line with higher cost of raw material.

“We have so far maintained relatively high operating rates [at polyester filament yarn plants], but margins for most polyester products have been squeezed,” a major Zhejiang-based downstream polyester maker said.

But the inventory has remained at the top side of 700,000-800,000 tonnes seen during the same period in 2012, a major trader said, citing that most MEG facilities in Asia and the Middle East are currently running at full capacities.

“We believe that MEG prices will continue its uptrend because the majority of market players are taking long positions,” a major Zhejiang-based trader said.

Most traders have changed their trading positions from short to long when prices hit $1,020/tonne CFR CMP in mid-July, triggering the price spike in the second half of last month, the trader said.

“Strong crude futures and positive movements on the macroeconomic front also fuelled traders’ speculations,” a Fujian trader said.

Positive developments on the global economy helped boost sentiment in the Asian MEG market. These include the US Federal Reserve’s announcement on 31 July that it will continue its monetary stimulus programme to buoy up the world’s biggest economy.

Latest data on China’s manufacturing activities, on the other hand, showed improvement, with the country’s purchasing managers’ index (PMI) reading in July rising to 50.3% from 50.1% in June.

The eurozone area also posted a manufacturing PMI at a two-year high of 50.3 in July.

Meanwhile, Chinese MEG traders may also be piling up on inventory to fulfil their contract supply commitments to customers, market sources said.

A number of traders in China usually sign monthly MEG supply contracts with polyester makers without a corresponding purchase contract from MEG producers, they said.

This meant that the traders need to tap the spot market for cargoes to fulfil their commitments to end-users. In a market on an uptrend, the traders are being forced to buy cargoes as early as possible to prevent incurring losses on their term contracts, market sources said.

“You rarely see end-users buying cargoes this year, because they all rely on contracted supply from traders,” a major Chinese trader said.

Buying activities are much stronger recently that most first-tier traders are holding back from selling their August cargoes, preferring to wait for higher prices, market sources said.

MEG’s price uptrend is likely to continue for some time, but there are also concerns that the higher prices cannot be absorbed by the downstream polyester industry, a major MEG producer said.

($1 = €0.76 / $1 = CNY6.13)

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

By: Becky Zhang
+65 6780 4359

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