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Insight | Time:Aug 11 2017 4:30PM
China's MEG prices retreat on heavy selling
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China's MEG prices hovered at high level for almost three months. The market witnessed rally, short squeeze, and the control of spot supply. The market seems lack clear directions in August. Will major players still control the spot supply, or will polyester plants in short of contract supply take the high-priced spot goods. However, market players might sell at high for profit takings, and those polyester plants in short of contract supply, might turn to use some coal-based MEG. It seems hard to predict which party will win the game in August. MEG market fundamentals are not very optimistic as well.

Coal-based MEG production rises apparently, operating rate exceeds 80%
Operating rate of domestic MEG plants rose sharply. On August 11, operating rate of all domestic plants was 84.58%, and of coal-based plants at 87.18%. Coal-based MEG output increased apparently as all plants runs well, except HNEC Xinjiang plant. According to CCFGroup's data, China domestic coal-based MEG production was 125kt in July 2017, and was expected to reach 140-150kt in August. Polyester plants raise usage of coal-based MEG, which will weaken the buying activities for spot supply.

Domestic prices higher than CFR China levels, declaration to maintain high in Q3
Arbitrage window to China remains open with the continual rise in China domestic prices, and deep-sea cargoes will gradually arrive in China. As for August, shipment from Indonesia and Thailand will increase, despite the cancellation from Saudi Arabia. Shipment from Iran will increase in September with the implementation of subsidy, and from Saudi Arabia will also arrive in H2 September. In addition, imports from South Korea and Singapore will also arrive normally. Besides the recovery of shipments and cargo arrivals, some financing firms may accelerate declaration on strong performance of renminbi and higher domestic prices.

Environment inspections in August may affect polyester operating rate
The stricter environmental inspections in August may affect the operating rate of water-jet looms in Zhejiang and Jiangsu. Polyester sales ratio has weakened for almost a month, and some producers often provide some discounts to boost sales. Later this week, sales ratio improved slightly as end-users procured. However, on Friday, MEG and PTA prices retreated with the decline in commodity prices. Operating rate of looms will decrease if implementing the rules required by regulators, thus polyester plants might lower operating rate on weakening sales ratio.

Currently, the indicators in polyester chain is not very optimistic. Spot supply remains concentrated and traders also become cautious, although a few players test shorts. Market participants are very cautious as they think the upward trend has ended. Currently, MEG supply and demand situation has changed. In addition, Indian Reliance has started commissioning at Jamnagar MEG plant. Once the plant runs smoothly, some deep-sea cargos will also turn to China.
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