INSIGHT: US MEG production faces short-term challenges after tariffs from China

23 August 2018 13:44 Source:ICIS News

SINGAPORE (ICIS)--From 23 August China levies a 25% tariff on US imports of mono ethylene glyclol (MEG).

In the short-term, US-based producers will face some challenges to divert the cargoes to other locations, while in the middle-to-long term, changes in trade flows will be inevitable to cater to the new facilities coming on board in the US.

Short-term Impact (2018 – H1 2019)

- Limited impact on China as US is not major supplier of MEG to China

- US-based producers miss opportunity to grow in H2 2018

- Increased urgency to seek alternative landing spots for US cargoes

The short-term impact, is likely to be limited for China given that US is not a major exporter of MEG to China but may present a missed opportunity and logistical issues for US producers.

Cargoes from the US to China tend to be seasonal, occurring in spurts in periods when local demand or import demand from Europe is unable to absorb production volume in the US.

As such, we can observe that there has been no fixed trend for US imports volume into China over the past 10 years despite a largely consistent increase in China import volumes.

Nevertheless, 2017 had the third highest import volume in the past 10 years, riding on the wave of a double-digit growth rate from China polyester.

Market sources indicated polyester growth rate in 2017 of 10-12%.

US to China MEG imports rose 270% year-on-year, to 182,690 tonnes in 2017. This is about 7.9% of the total US nameplate capacity of MEG, according to ICIS data and China custom data.

China MEG imports from US

US MEG Capacity

Company COUNTRY Capacity (Tonnes)
EQUISTAR CHEMICALS USA 265000
INDORAMA VENTURES USA 355000
SHELL CHEMICALS USA 410000
SASOL USA 25000
EASTMAN CHEMICAL USA 120000
FORMOSA PLASTICS USA USA 370000
HUNTSMAN INTERNATIONAL USA 450000
DOW CHEMICAL USA 300000

With the additional duty for US cargoes, we can expect import volumes from the US to China to dip significantly in 2018 instead of growing alongside further strong polyester growth.

China’s 2018 polyester growth rate is also expected to be high following the start-up of several new polyester fibre and bottle resin plants in the first half of this year.

Country Name Capacity

(KT tonnes)

Product Start-up Date
China Yizheng 100 Staple Fibre End May 2018
China HuaHong Chemical Fibre 100 Staple Fibre End May 2018
China Xin Feng Ming 300 Filament Yarn, Fibre Chip H1 June 2018
China Tongkun 600 Filament Yarn End May 2018
China Hua Xi Cun 200 Staple Fibre Mid May 2018
China Cheng Xin 600 PET Bottle Chip Mid May 2018
China Lu Yu 100 Fibre Chip Early May 2018
China Xin Feng Ming 300 Filament Yarn H1 April 2018
China Tongkun 300 Filament Yarn H1 April 2018
China San Fang Xiang 500 PET Bottle Chip End June

The issue, then will be – what should be done to the US cargoes which cannot be sold to China?

Three options are available.

Direct sales
In terms of freight, it would be the most practical for US cargoes to be diverted to Europe. US to Europe trade flow is also well established.

However, with a persistently strengthening US dollar coupled with limited growth in demand in the European market, the attractiveness of these imported cargoes are diminished in the spot market.

It will also be very difficult to raise term contract volumes to Europe immediately. Any major adjustments to volumes probably can only take place during the next round of term contract discussions later in the year.

There may be the possibility for these cargoes to flow into southeast Asia or India on a spot basis but volumes will be limited given that southeast Asia and India are generally not expected to be short of MEG. Reliance Industries started up a 750,000 tonne/year plant in India in late 2017 and there was an expansion at Polychem’s Indonesia plant.

Petronas’ 500,000 tonne/year plant is also expected to come on stream in the first half of 2019.

Freight rates from the US to southeast Asia and India are also less competitive than intra-Asia shipments.

Given the lack of alternative locations for US cargoes, it will be challenging for US producers to make spot sales in the near term without discounts.

Swaps
Another option would be to perform swaps with cargoes from other regions. The swapped cargoes would then be imported into China instead of the US-origin cargoes.

For example, US cargoes can be imported into Country A for Country A’s domestic usage and Country A’s domestic produced cargoes can then be exported to China.

Workable locations for swaps include northeast Asia, southeast Asia, the Middle East and India.

Europe, on the other hand, may be less viable as a swap destination, given that a Europe to China trade flow is not as established and would be likely to lead to higher freight and logistic costs.

The downside of swaps on a short-term basis will be additional logistic costs, the effort needed to find cargoes with suitable shipping periods and possible premiums charged on the swapped cargoes because of the urgency.

Reducing production rates
The third option would be to reduce US MEG production in the near term. Although this is a possible scenario, it is the least ideal for producers at the moment as it means a loss of revenue from sales if margins are at acceptable levels.

A reduction in production is also likely to result in conceding market share to regional producers, in view of the growing demand from China’s downstream polyester sector.

Long-term impact (H2 2019 onwards)

- Trade flows outside of China to change

- Additional logistics costs for handling US MEG

- Import volume of Asian countries outside of China to increase

More than 3m tonnes of MEG capacity is expected to start-up in the US between 2018 and 2022. The initial expectation was for US to turn from a net importer into a net exporter after the capacities come on stream. Also, the expectation was for a substantial portion of these cargoes to be exported to China.

While the US will still turn into a net exporter of MEG, adjustments will be made to trade flows in order to accommodate the addition US production. Hence, the long-term impact will mostly be in terms of trade flows.

Similar to the short-term impact, swaps are one of the options for handling the additional cargoes.

The difference is that there will be more time available to plan the appropriate logistics and time table for executing the swaps.

This will allow for a more systematic long-term arrangement to take place which will allow some cost-savings and potentially less disruption.

US MEG Expansions (2018-2022)

Company Country Capacity Date
Sasol North America USA 250000 2018-2019
Lotte Chemical Corp USA 700000 2019-2020
MEGlobal USA 750000 2019-2020
Formosa Plastics Corp USA 800000 2019-2020
Formosa Plastics Corp USA 900000 2022
Exxon Mobile / Sabic USA Not Available Yet 2021-2022

The upcoming facilities are mostly operated by major MEG producers who already have large facilities outside the US.

This is also an advantage, as it allows swaps to be done internally within a company.

Similar to the short-term impact, it is also more advantageous for swaps to take place between US and Asia/Middle East MEG cargoes, as compared to US and Europe cargoes.

It can be expected that most US cargoes will still be brought into Asia, just not China.

Hence, an increase of US cargoes being exported to various Asian countries and Canada instead of China can be expected.

At the same time, there may be increases in import volumes to China from these various countries after the new US plants come on stream.

However, this may be affected by upcoming new capacities in China which will reduce China’s dependency on MEG imports.

China MEG imports

By Eric Su

By Eric Su