China MEG: Understanding A Doubling Of Inventories

MEGinventories8Aug

By John Richardson

THE chart above shows how mono-ethylene glycol (MEG) coastal inventory levels in China have more than doubled since 2010. One explanation might be that the substantial increase in MEG demand since 2010 means that inventories, as a proportion of this total demand, haven’t increased that dramatically. Real consumption of all the three ethylene glycols had risen to more than 11m tonnes in 2013 from around 9m tonnes in 2010, according to ICIS Consulting (real consumption is consumption adjusted for inventory distortions).

But is this surge in coastal inventories, which comprises stocks of imported material, justified by the current state of the market? Polyester demand has been persistently described as weak throughout this year.

We think this weakness is the result of:

  • Reduced growth in credit as China rebalances its economy.
  • Increases in labour costs that continue to erode the competitiveness of apparel and non-apparel manufacturers.
  • The collapse in cotton prices. Cotton prices peaked at 97.35c/lb on 24 March of this year and recently fell for 11 straight weeks – the longest slump in 55 years. One would have thought that more cotton is now being blended in cotton/polyester shirts than the was the case a few months, which, of course, reduces the demand for polyester, which is made from raw materials including MEG.

“To some extent, MEG has been bought not for real demand, but instead as a financial instrument to fund property deals,” an industry observer told us last month.

With local credit harder to come by, opening letters of credit with overseas banks in order to import MEG – and perhaps polyethylene – might be a way around this problem.

And so, what are some of these imports being really used for?

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