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MEG Continues To Struggle

Business, China, Company Strategy, Economics, Fibre Intermediates, Middle East, Taiwan
By John Richardson on 04-May-2012

2MEG4May2012.pngBy John Richardson

THE above chart is a further illustration of what we believe is the wrong consensus view over China.

Q1 2012 mono-ethylene glycol (MEG) imports surged by 30% compared with the same period last year, as traders bet on a sharp rebound in China’s economy. They believed all the talk of more local economic stimulus and a stronger global economy.

But as of last week, inventory levels in China’s coastal storage tanks totalled 860,000 tonnes compared with the usual 400,000 tonnes.

Not surprisingly, therefore, MEG pricing has been declining, while ethylene feedstock costs have increased on higher oil and therefore naphtha prices:

MEGpricing4May2012.pngMEG spot pricing edged-up slightly this week, by $22-27/tonne to above $1,000/tonne CFR China Main Port, reports my ICIS colleague Judith Wang.

This is the result of turnarounds, some of which, according to Becky Zhang – another of my ICIS colleagues – are prompted by the poor market.

For example, a major Middle East producer is shutting down during the peak textile manufacturing season (April-June) to fix mechanical problems.

Taiwan’s Nan Ya Plastics is to begin a turnaround at its 720,000 tonne/year No4 plant at Mailiao in Taiwan in mid-May, which will last for 40-50 days. The shutdown was originally due to take place in April, was then delayed until July because of good margins at the start of the year, and has now been brought forward to May because of the weak market.

Another reason given for this week’s slight uptick in pricing is anticipation of stronger demand after the 29 April-1 May Labour Day holidays in China.

We have heard that story before! The recovery in China is always just around the corner.

If supposedly structurally tight MEG continues to struggle, this further underlines our argument that DEMAND is the thing, and that conventional ways of looking at markets need to be revisited.