China polyester to drive MEG, but oversupply fears

22 March 2018 17:09 Source:ICIS Chemical Business

Robust demand from polyester production in China is expected to drive the Asian monoethylene glycol (MEG) market in the first half of 2018.

Stronger demand for MEG will be supported by consistently higher production rates at polyester facilities and the new capacities for polyester that were started up in China in late 2017.

However, there is a potential risk of oversupply from 2020 onwards because of the addition of several large MEG production capacities in the US, Saudi Arabia and Malaysia in 2019 and 2020.

POLYESTER GROWTH FIRM

China is the largest consumer of MEG globally and a major importer of material from the Middle East. Last year saw a higher-than-expected growth rate in the country’s polyester market. Total import volumes into the country rose above 8m tonnes, after slumping to 7.6m tonnes in 2016.

More than 90% of MEG produced globally is used to make polyester fibre and bottle resin. Global polyester fibre capacity in 2016 was estimated at 73.6m tonnes, with China accounting for 53.3m tonnes (including idle plants), according to ICIS data.

Global PET resin capacity in 2016 was estimated at 32.8m tonnes, with China accounting for 10.7m tonnes. Polyester textile growth rates in China were around 11% in 2017, up from 3.6% in 2016. Previously, markets were only expected to grow at 2-3% for 2017 because of an expected slowdown in China’s GDP in 2017.

The higher-than-expected rise in China’s GDP led to a strong 2017 performance in polyester. China’s GDP growth was 6.9%, according to the country’s statistics bureau, beating 2016’s growth rate of 6.7% and 2017’s official full-year target of around 6.5%.

As a result of the growth of the polyester sector in China, there are expectations of an increase in overall demand for MEG from the country in 2018. For 2018, the estimate for polyester growth is 5-6%, as China’s GDP growth in 2018 is expected to be lower at 6.5%, as compared to 2017’s 6.9%.

EVOLVING LANDSCAPE

The Chinese polyester market has been evolving over the past two years as producers have refined the way plants are managed. One of the drivers for this change is the enforcement of stricter controls over environmental policies in China.

As polyester plants tried to meet environmental standards set by the Chinese government, costs of running the plants increased. Some of the smaller-scale polyester plants have become increasingly uncompetitive and so have been idled.

Polyester plants without integration with feedstock production are also at a disadvantage in terms of material costs. These plants have been acquired by larger polyester plants with improved economics.

The result of these mergers has this been to stabilise operating rates across Chinese polyester facilities and improve control of inventory levels. This has benefited MEG consumption growth.

According to ICIS data, operating rates of polyester facilities in China have been largely stable at 79-82% since March 2017. In 2016, polyester operating rates fluctuated from 73-80% while in 2015, they were at 70-82%.

Declines of 7-10% in operating rates in January were seen in both 2016 and 2017 but there was only a 2% drop in January 2018.

There is an expectation that this stabilisation of polyester operating rates will continue in 2018, unless a major shift in the political or macroeconomic landscape occurs. Stable operating rates at polyester facilities will in turn support a more constant consumption of MEG, which is good for growth in 2018.

MIDDLE EAST EXPORTS

MEG imports into China rose in 2017 by 15.6%, year-on-year, because of good growth rates in downstream polyester.

Middle East cargoes to China were around 4.6m tonnes in 2017, 52% of the total imports into China, with Saudi Arabia the largest exporter with 3.85m tonnes.

Imports are generally expected to increase in 2018 because of the expected growth of polyester.

Middle East origin cargoes, previously allocated for India, are expected to be diverted into China after the start-up of Reliance’s 750,000 tonne/year MEG plant in Jamnagar, India in late 2017. India had required an estimated MEG import volume of around 1m tonnes/year, so the new plant will satisfy some of that demand and MEG exporters previously supplying Reliance may have to divert cargoes to other regions.

The expansion at Saudi Kayan’s olefin and ethylene glycol/ethylene oxide (EG/EO) plants in Jubail, Saudi Arabia is also likely boost some of the export availability from this plant.

EXPECTATIONS FROM 2020

The large MEG capacity increases are leading to concerns of oversupply by the end of the decade.

From 2016-2018, ICIS expects global MEG capacities to grow by around 2.8m tonnes/year. By 2020, additional capacity of 2.69m tonnes/year is expected in the US, 0.74m tonnes/year in Malaysia and 0.7m tonnes/year in Saudi Arabia.

China also has new MEG capacities planned from 2018-2020.

Nonetheless, we can see that the expected minimal growth of MEG volume (5.49m tonnes/year) from 2016-2020 will need at least 16m tonnes/year of new polyester capacity to be installed.

The critical question will be whether this increase in capacity can be absorbed. If we assume a 5%/year growth solely based on the global polyester capacity from 2016 onwards, there will be an increase of 12m tonnes/year of polyester, which translates to around an additional requirement for 4.1m tonnes/year of MEG.

The increase in MEG capacity is likely to outpace the increase of polyester capacities by 2020, if polyester capacity growth rates are only at 5%. China is the most likely destination for most of the additional MEG output form 2020, for several reasons.

First, China will remain the largest polyester manufacturing hub, accounting for almost 60% of polyester production capacity globally. This is not expected to change over the next few years. This means that China will be the market that has the largest appetite for MEG.

Saudi Arabia has been the largest exporter to China, and it can expected that it will try to expand its presence further, after the start-up of the new plant in Jubail.

The next largest polyester market, India, is expected to become a lot less dependent on import materials after the start-up of Reliance’s new MEG facility in late 2017.

Southeast Asian markets do not have as large a bandwidth to absorb that large an amount of additional PET. Some of these countries have dominant domestic MEG producers present in the local markets. So the reliance on imports will be generally limited.

For other markets, intra-southeast Asia trade will have the edge in terms of logistics and freight costs over US origin cargoes.

Finally, although most of the additional MEG capacities will be in the US, it will be difficult to see the US absorbing all the capacity.

Additional PET resin capacities are expected to come online in 2020-2021 in the US and will consume some of the additional MEG. However, given the large volumes of MEG capacity being added in the US, it can be expected that most of the additional material will be exported, primarily to Asia.

The new capacities out to 2020 include the recently announced investment by SABIC, which is planning to add 700,000 tons/year of MEG capacity in Jubail by 2020.SABIC is also considering adding MEG capacity in the US in its proposed cracker and downstream joint venture with ExxonMobil.

Other MEG capacity expansions in North America include the new 750,000 tonne/year unit being built in Freeport, Texas, by MEGlobal; Formosa Plastics’ 800,000 tonne/year plant at Point Comfort, Texas, due in Q4 2018; Sasol’s 300,000 tonne/year unit in Lake Charles, Louisiana, due in the second half of 2018; and Lotte Chemical’s unit of 700,000 tonne/year at St Charles, Louisiana, due in the early 2020s.

Looking past 2020, PTT Global Chemicals is considering a 500,000 tonne/year MEG unit as part of its cracker project in Belmont County, Ohio. And in Asia, Petronas Chemicals has a 740,000 tonne/year project planned for Malaysia, scheduled to start in 2020-2021.

By Eric Su