China MEG Market Points To Risks Ahead

EG2March2014

By John Richardson

SOMETHING very disturbing is going on in China’s mono-ethylene glycol markets (MEG), which, we, think, reflects the following:

  • Failure to read the economic tea leaves. A sharp contraction in credit growth threatens to leave 2014 GDP growth a lot lower than many chemicals companies have forecast.
  • The possible use of MEG as a means of getting hold of credit in order to complete property deals. We have only heard this from one MEG industry source, but it would fit with the widespread practice of “circular trades” that have helped to inflate chemicals and polymers demand over the last five years – ever since China went on a historically unprecedented credit binge. “I think what has happened is that some traders, who also dabble in property, have bought MEG just to get hold of 80 or 190 day overseas letters of credit,” said the source. “They have then used the credit to complete property investments, whilst hoping to sell the MEG at a reasonable margin before their LCs mature.  They have been forced into doing this because domestic credit has become a lot harder to get hold of.”

This helps to explain why in January 2014, China imported around 936,000 tonnes of MEG compared with approximately 716,000 tonnes in January of last year, an increase of some 30%, according to Global Trade Information Services.

But this is obviously just one of month of data and January is often an unusual month for data because of the distorting effects of the Lunar New Year (LNY).

The LNY fell on 31 January in 2014 compared with 10 February last year, which means that inventory building ahead of the holidays was brought forward in many chemicals and polymers. Thus, more cargoes were booked in December 2013 for arrival the following January than in the previous December.

Still, though, if the surge of imports was mainly down to the LNY distortion, why is it that China eastern coastal inventories of MEG rose by a further 2,000 tonnes last week to an all-time record high of 1.14m tonnes, according to our colleagues at ICIS pricing?

Weak downstream polyester demand and concerns that lack of credit will make demand down even weaker led to a further decline in pricing for the week ending 28 February (See the above chart)

China may, of course, still “blink”. This remains the base case for many chemicals and polymers producers.

We should get a clearer idea of whether another “blink”  is going to happen on Wednesday, when Premier Li Keqiang presents his annual work report to the National People’s Congress – China’s annual parliamentary meeting. The report will further outline plans for the economy following the announcement of a major new reform agenda last November.

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