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Insight | Time:Feb 1 2018 2:22PM
China's MEG to weaken with downstream plants shutting down
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MEG prices tuned to the downside in the second half of January, after hitting the highest level of 8,295yuan/mt on January 15. The last high occurred in earlier February of 2017 at 8,270yuan/mt. The price was mainly pressured by weakening buying activities, although port inventory kept decreasing on bad weather condition and import was less than previous expected.

More polyester plants settled plans for cutting operating rate or shutting down units for Chinese Lunar New Year holidays, and operating rate of texturing and end-users decreased apparently. By end January, operating rate of looms in Zhejiang and Jiangsu fell to around 45%, and of texturing plants fell to around 60%. Actions for going long seemed have halted with rapid position reduction for February contracts.

MEG inventory build-up might be limited, compared with PTA and other polyester products. Operating rate of polyester plant is expected to witness the lowest level of 78-79% in February 10-20. The rate will recover gradually since end February, and average levels for January, February and March are expected to be 89.5%, 82%, and 90%, respectively.

Domestic MEG production is estimated at 545kt in January, import around 750kt and polyester production at 3.65 million mt. MEG inventory is expected to decrease slightly in January. However, polyester production will be low in February, and MEG inventory is expected to increase about 150kt.

In March, domestic MEG production may increase on limited turnarounds and rising output of coal-based MEG. While demand for MEG is also expected to increase in March, with restarts of polyester units and scheduled startups of Hengbang's 300kt/year, Jiaxing Petrochemical's 300kta, Xinfengming's 300kt/year, and the restart of Hongjian's unit. Total MEG inventory is expected to increase about 150-200kt/year in the first quarter.

Looking through the historical figures, MEG inventory build-up was up to around 400kt in the first quarter of 2014, due to the sharp fall of polyester operating rate during Lunar New Year holidays and the output increment with the startups of Fund Energy and Sinopec-SK Wuhan Petrochemical in 2013. In other years, the changing range of total MEG inventory was within 200kt.

As for port inventory, it might show different trend with total inventory level. In Q1 2016, total inventory decreased apparently, while port inventory in East China increased. In 2017, rise in port inventory was less than in total inventory. The change was mainly due to different purchasing activities. Buying from polyester plants slowed down in Q1 2016, while was robust during Q1 2017.

Currently, crude oil prices consolidated at high level, while commodity futures were mixed. MEG prices are expected to move down as many polyester plants will shutdown units in the first half of February.

It is still uncertain whether supply-demand condition will improve after Chinese Lunar New Year (late Feb). Eyes could rest on changes of polyester product inventories, macro environment, and crude oil prices.
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