EPCA ’15: MEGlobal plans spot market entry, committed to Europe – CEO

BERLIN (ICIS)–MEGlobal plans to enter the spot market for monoethylene glycol (MEG) in 2016 to stop it being dominated by traders, its CEO said.

Speaking on the sidelines of the 49th annual European Petrochemical Association (EPCA) meeting, MEGlobal chief Ramesh Ramachandran said that spot prices do not currently represent the true market value of MEG.

“If the entire spot market is dominated by traders, they don’t represent the market dynamic. Our customers are very uncomfortable that the spot price does not represent the true market price. If the delta is too large it needs to be rebalanced.”

According to ICIS data the newly settled October contract is €825/tonne FD (free delivered) NWE (northwest Europe) gross, and spot is around €700/tonne CIF (cost, insurance, freight).

Spot margins are also very good, added Ramachandran. MEGlobal is not currently very active in the spot market but it is planning an entry for 2016 as the contract negotiation season now gets underway.

“At the moment we are barely in spot so could feel comfortable with 10-15% spot. We are working towards that and just testing the waters.”

He added: “We haven’t made a decision yet but we are seriously considering reducing our [contract] volumes as we feel comfortable exposing ourselves to more spot.”

He said the boost to spot volumes would be focused more on Asia than Europe.

“Of course it comes with a lot of risk but it will still be a small percentage and is worth doing – it appears to be a prudent risk.”

A European MEG trader said: “2016 is going to be a mess. There are too many people [selling].”

Ramachandran said MEGlobal remains deeply committed to Europe, rebutting an earlier report that Europe was no longer strategic for the company.

“We have diverted cargoes from Kuwait to Europe and volumes in Europe are very good. We have increased our staff in Europe in the customer service and logistics area,” he said.

A customer said: “MEGlobal is coming back [into Europe] in a big way.”

In Europe MEG and diethylene glycol (DEG) demand has been very good in 2015, driven by downstream polyethylene terephthalate (PET) for bottles thanks to a good summer, Ramachandran said, adding that the use of recycled PET and down-gauging has reached its limits, further stimulating growth.

He believes the weakening of the euro against other currencies has made sourcing from Europe more attractive for downstream PET customers.

“The biggest challenge in Europe is the very depressed margins of our MEG customers. That’s the challenge – you want your customers to be profitable.”

Ramachandran said that in China – which represents 50% of MEG demand – the market has grown by 4.8% in 2015 and he forecasts growth of 5% for 2016. “Europe has seen PET demand growth of 5% this year – these are extraordinary numbers.”

He said downstream polyester and PET demand is growing much more quickly than conventional ethylene derivatives. At today’s prices PET is eliminating other packaging materials for drinks.

“One of the biggest surprises is that growth and demand has been so resilient globally for MEG and DEG. Asia growth has been lower but you are working from a higher base point.

If these trends continue supply will get very tight as coal-to-MEG has run into a lot of bumps.”

However margins for ethane-based MEG producers such as MEGlobal have fallen as the oil price collapse meant prices have fallen too.

“Longer-term if oil creeps back up to $70-80/bbl then we will have a robust, healthy market. If it falls then survival will not be an issue, however higher oil prices are good for ethane-based producers.”

Established in 2004, MEGlobal is a joint venture between Dow Chemical and Petrochemical Industries Company (PIC) of Kuwait. MEGlobal manufactures more than 1m tonnes/year of EG at its three manufacturing plants in Alberta, Canada. It markets more than 3.5m tonnes from supply partners.

He said: “Both of our parents are very happy with what the JVs have done. There is support for us to grow and invest.”

Interview article by Will Beacham and Caroline Murray