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Insight | Time:May 18 2018 10:33AM
Forecast for PTA and MEG fundamentals in Q2 and Q3
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In January-April 2018, China抯 polyester market continued its high rate of growth of 2017, with polyester production up more than 11% from the same period last year. Polyester output and consumption remained healthy, while feedstock supply was also high supported by seasonal factors. PTA production rose about 15% year on year in January-April 2018, with supply surplus more than 800kt. While MEG production grew less than 7% y-o-y in the first four months of 2018. Import was the critical factor that influenced fundamentals, as we previously expected. In the first four months, China抯 MEG imports surged by more than 21% year on year, exerting heavy pressure on MEG supply side. Overall supply for MEG was more than 500kt in January-April. MEG supply-demand structure was weaker than PTA. 

How will polyester feedstock market move in the following months?

Firstly, most PTA unit turnarounds are in April-June for the first half of 2018, and supply gap would be the biggest in 2018. After July, Fuhaichuang will raise operating rate and there will be less turnarounds. Monthly surplus is estimated at more than 150kt since August. Therefore, the market is expected to be tight balanced and buildup for PTA inventory is anticipated around 300-350kt. The supply-demand condition might change after Yisheng finishing turnaround in early June. PTA spot-futures spread is expected to retreat with rising inventory level and easing spot availability.

Domestic MEG output will decrease in April-June due to turnarounds, while the market could be broadly balanced on high import volumes. Given supply from new units and uncertainty of polyester plant operating rate after July, MEG inventory is expected to increase by 40-50kt per month. In the coming months, total MEG inventory is expected to remain around or above 1.5 million tons, showing inventory/consumption ratio around one month. In addition, high port inventory could be normal in the coming months. 

In terms of PTA-MEG spread, the two presented negative correlation for a long time. However, the situation changed since the second half of 2017 due to buying activities of MEG from major players. Inventory/consumption rate of PTA and MEG will keep increasing, and MEG-PTA spread of 1,500-2,000yuan/mt could be rational.

Recently, polyester sales ratio weakened slightly, and PFY inventory may increase. However, the room for price decline of PFY is limited due to firm crude oil and feedstock prices. Some plants might provide discounts. MEG market was mainly affected by monthly average price, and for June, eyes could rest on activities of major players. Prices may also move up. As for PTA, eyes could rest on crude oil and unit turnarounds. Risks accumulates in anticipation of oversupply in June and July.
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