INSIGHT: China MEG market weighed down by rising inventories

SINGAPORE (ICIS)–An unusual increase in inventories in main ports in east China has weighed down on monoethylene glycol (MEG), which is widely used as a raw material  for polyester and textile fibre.

MEG inventories at the major domestic ports have been rising continuously and hit a record high after the Lunar New Year holiday (15-21 February).

According to ICIS data, MEG inventory volumes in China’s east coast main ports were over 900,000 tonnes in early May, as opposed to an average level of 500,000-600,000 tonnes throughout 2017.

The last time inventories crossed the 900,000 tonnes threshold was in 2014. Downstream polyester producers largely had cut their plants’ operating rates to fight against the high cost of the other major polyester raw material purified terephthalic acid (PTA). MEG demand declined significantly as a result.

An increase in US arbitrage arrivals in 2017, and an overall increase in imported contractual volumes of the molecules, are the main causes for the high inventory levels.

US dollar-denominated MEG import prices were more competitive than domestic Chinese yuan dominated prices during most of 2017, which spurred import buying appetite resulting in a widespread increase in contractual arrivals.

What’s more, in the major downstream sector, polyester producers ran at high levels in 2017, given the regained margins compared with the second half of 2016, resulting in an increase in output of more than 10%.

There are around 4-5.9m tonnes of new polyester capacity plan to be put into production in 2018, an increase of more than 10% on a year-to-year basis.

This will require 1.3m-1.7m tonnes of MEG in 2018, a fact which which also increased demand for MEG imports.

Another reason for the high inventories is that the rate of off take rate slowed because of the increased use of coal-based MEG in the polyester sector.

Prices of coal-based MEG were much lower than those for ethylene-based material, and attracted downstream polyester players.

The coal-based MEG process technology has improved over the past few years, meaning that more coal-based MEG can be used directly for polyester production.

China’s production of coal-based MEG rose 64% year on year to reach 1.56m tonnes in 2017.

Out of this, 66% of production was used to make polyethylene terephthalate (PET) while the rest was used in anti-freeze and unsaturated polyester resins (UPR), according to ICIS data.

The volume of coal-based MEG used to make polyester is expected to rise significantly in 2018 due to a stable operating rate on the current coal-based MEG plants and several new coal-based MEG facilities due for start up.

China’s coal-based MEG plants are expected to operate at a relatively stable 60-75% in 2017-2018, while, the average operating rate in 2013-2016 was around 40%.

There are plans to add about 3.05m tonnes of new MEG capacity in 2018,  2.65m tonnes of which will be be coal based.

Company	Capacity ‘0,000tonnes/year	Technical	Production Time
Xinji Chemical	6	Coal-based	March-April 2018
Shanxi Yangmei Pingding	20	Coal-based	started in Nov 2017, running at 30%
Yongjin Luoyang	20	Coal-based	started in Dec 2017
Yongjin Xinxiang	20	Coal-based	start in End Jan-early Feb 2018
Lihuayi Group	20	Coal-based	started in Dec 2017, put on production in Jan
Xinjiang Tianye	10	Coal-based	start in August 2018
Tianying Petrochem	15	Coal-based	start in March- April 2018
Xinhang Energy	20	Coal-based	start in June 2018
CNOOC and Shell	40	Ethylene-based	start in June 2018
Qianxi Coal Chemical	30	Coal-based	start in June-July 2018
Anhui Hongsifang	30	Coal-based	start in June-Sep 2018
Inner Mongolia Yigao Chemical	24	Coal-based	start in June 2018

Gave these circumstances, MEG inventories might continue to hover around these relatively high levels for the rest of 2018.

The high inventories in China have already largely dragged down Asia MEG prices.

China domestic spot prices have been CNY6,800-6,900/tonne ex-tank east China, down by CNY1,050/tonne, or 13%, compared with the end of April.

The dollar-dominated price has been  $893-899/tonnes, a fall by $110/tonne, or 11%, compared with the end of April.

By Ivy Ruan