OUTLOOK ’14: Asian MEG poised for hikes as demand tops supply

By Becky Zhang

SINGAPORE (ICIS)–Asia’s monoethylene glycol (MEG) prices are poised for further increases in 2014 on the back of limited addition of supply and continued demand growth from downstream polyester fibre and polyethylene terephthalate (PET) sectors, industry sources said.

However, speculative activity is expected to be curbed by China’s prudent economic restructuring policies, and global economic impact may also restrict price gains, the industry sources added.

Asia’s spot MEG prices were hovering at $1,023-1,035/tonne (€737-756/tonne) CFR (cost & freight) CMP (China Main Port) during the last two weeks of 2013, a lower level compared with the yearly average of $1,051/tonne CFR CMP, because tight bank liquidity and an unclear market outlook curtailed buying activity.

“We expect MEG prices to recover only after the Chinese Lunar New Year holiday because of a short-term oversupply,” a major regional trader said.

China’s MEG inventories at coastal areas were on a rising trend and reached 841,000 tonnes in the week ended 20 December.

Meanwhile, the major downstream polyester filament yarn (PFY) producers in China are cutting down their production to ease inventory pressure and to minimise losses amid a year-end lull.

The policy that China’s commercial banks restrict issuing letter of credit (LC) for re-exporting purposes, an effort to tame excessive liquidity in the commodity trading arena, continued to curtail traders’ buying interest for US dollar-denominated cargoes, sources said.

While the prudent monetary policy will continue in China in the new year and will restrict speculations among traders, the medium-to-long term outlook for MEG’s market fundamentals remains strong, a major MEG producer said.

“We expect MEG margins to stay strong in 2014 because of expected tighter supply,” the producer said.

The average spread between MEG spot prices and feedstock ethylene cost remained high at $243/tonne in 2013, slightly lower than the spread at $263/tonne in 2012, but is way above MEG’s break even margins at $100-150/tonne, according to ICIS.

The spread was at a yearly low of $136/tonne in the week ended 20 December because of surging feedstock ethylene prices and poor demand from downstream polyester industry.

MEG supply will be in short in 2014 on paper studies, the producer said.

A Middle Eastern MEG major has cut its 2014 contract allocations to a few major customers, according to market sources.

The producer said they plan to conduct major plant turnarounds at two of its 10 MEG plants in Saudi Arabia in the third and fourth quarter respectively, each to last for around two to three months to change reactors.

The two units, located in Jubail, have a combined capacity of 1.34m tonnes/year.

The producers’ eight other MEG plants, with a combined capacity of 4.37m tonnes/year in both Yanbu and Jubail, will undergo plant maintenance in turns in 2014, each lasting for around two weeks, the producer said.

China’s Sinopec has also planned a major one-month turnaround at its largest 650,000 tonne/year MEG unit in Zhejiang province under its subsidiary Zhenhai Petrochemical in the second quarter, according to the producer.

It will be the first turnaround at the unit after its start-up in 2010, the producer added.

Taiwan’s Nan Ya Plastics, a major northeast Asian MEG producer, has not fixed a turnaround schedule for its 1.8m tonne/year MEG units, but said regular annual maintenance for safety checks will be conducted as ordered by the local government.

Japan will see heavy turnaround at upstream olefins plants in 2014, and this will hamper MEG production at four to five units in the country, with an estimated production loss of 60,000-70,000 tonnes.

Meanwhile, new MEG  plant start-ups will be limited, market players noted.

Only two new naphtha-based MEG units are expected to be put into operations in the new year, both in the first quarter of 2014, according to industry sources.

PetroChina is planning the start-up of its new 360,000 tonne/year MEG plant at Pengzhou, Sichuan province, in early 2014, a company source said.

The company had initially targeted to start up its refinery and petrochemical complex in September 2013, but postponed its plan because of damages to its crude pipeline in its upstream refinery plant.

Taiwan’s China Man-Made Fiber Corp (CMMFC) aims to start up its new 200,000 tonne/year MEG plant at Kaohsiung in January following an unsuccessful trial in mid-December 2013 because of facility issues, a company source said.

However, the unit will not be able to run at full capacity in 2014 because of a lack of oxygen as utility construction is lagging behind, the source said.

There are a few coal-based MEG projects ongoing, but uncertainties in terms of stability of operations and product quality have kept coal-based MEG away from the major downstream polyester industry.

With limited addition of supply, the MEG market will not be able support a demand growth of 6-7% from Asia’s downstream polyester fibre and PET sectors, an international trader said.

Asia had an additional of 6.9m tonne/year net polyester capacity in 2013 and is likely to add another 5m-6m tonnes of new polyester capacity in 2014, according to ICIS.

Around 0.34 tonnes of MEG is required to produce one tonne of polyester product.

The international trader said it was not able to locate more cargoes for the new polyester makers in China because of limited sources.

However, a separate major regional trader said despite the same expectation in the past few years, short supply in MEG “never came true”.

“The strong expectation of [the] MEG [market] will eventually rely on demand,” the trader added.

Demand may be curtailed as a result of an expected slow recovery of global economies, which has cast a gloom over Asia’s MEG market.

($1 = €0.73)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections