By John Richardson
CHINA'S mono-ethylene (MEG) market was supposed to be very strong this year.
But instead, to date we have seen persistently weak market conditions that few people, least of all the traders, seem to have anticipated.
The traders appear to have been taken in by the hype and booked cargoes for delivery to China that they are struggling to sell. A few weeks ago, 800,000-850,000 tonnes were reported to be in storage tanks on the east coast compared with the usual 400,000 tonnes.
"MEG buying interest remained low because of soft polyester sales," wrote my ICIS pricing colleague, Becky Zhang, in her MEG price report for the week ending 6 April.
MEG market participants expressed hope that more government economic stimulus might be on the way, resulting in a recovery in demand and pricing.
This hope has been frequently expressed down many petrochemical chains throughout this year. But the central government is hamstrung. It cannot afford to boost lending by too much, or aggressively cut interest rates, because of food-price inflation. A big new round of fiscal stimulus would also hamper its reform agenda, made more difficult by the leadership transition.
MEG was supposed to be the "shining star" of 2012.
The accepted wisdom at the start of this year was that the market would become tight as global capacity additions were lagging demand, with China the main driver of demand.
Two new world-scale plants were said to needed every year - about 1.5m tonnes/year of capacity. Feedstock constraints in the Middle East and lack of investment in Asia had led to a big shortfall in investment, claimed industry observers.
Demand would also continue to boom in China, growing at around 12 percent in 2012, the observers believed.
But China's demand growth, as we have seen, is the big problem. It may now only grow at around 8 percent, say some commentators.
The pricing chart above indicates that as the price of ethylene has risen, the price of MEG has fallen.
Ethylene has increased because of production cutbacks resulting from margin pressure exerted by high naphtha and oil prices.
But MEG producers have, quite clearly, failed to pass-on these higher costs to their customers, reflecting the weakness in demand.
If the "shining star" of 2012 continues to perform as badly as this, what are the prospects for other products where supply is not supposed to be as tight?