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Insight | Time:May 23 2018 10:25AM
China's MEG to move down on weak supply-demand condition
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--Prices of most PFY specifications decrease
--MEG supply-demand situation weakens
--High MEG port inventory weighs on market sentiment

Prices of most PFY specifications decrease by 50-200yuan/mt or even 300yuan/mt for some specs on May 22. On top of that, PTA futures decreased after rising on unit turnaround news, MEG prices also went down. MEG price fell from around 7,900yuan/mt in early May to about 7,200yuan/mt, and then kept consolidating for around 8 trading days on firmer crude oil and steady demand from downstream polyester. MEG supply-demand condition weakened and market sentiment was cautious as current price was lower than holding costs and MTD average price. As for downstream polyester sector, end-user demand was expected to soften in medium to long term.

Traditional lull in polyester demand gets nearer. PFY sales ratio was around 90% in the first half of May. Producers may face more pressure in sales if they do not lower price to boost sales. In addition, new orders for PET bottle chip also weakened in May, compared with in March and April. Transactions were lukewarm due to high prices and upcoming new capacities.

MEG supply increased in the fourth months of 2018. Due to higher prices in Chinese market in end 2017 and early 2018, arbitrage window to China was opened. According to China Customs, China imported 2.545 million tons of MEG in the first quarter of 2018, up 19.4% year on year. In addition, operating rate of domestic MEG plants remained high with output reaching more than 1.7 million tons in Q1, up around 10% from the same period last year. Total MEG surplus for Q1 was around 550,000 tons.

By May 17, MEG inventory in East China main port rose above 1 million tons mark to stand at 1.004 million tons, up around 115.9% from end 2017. This was the highest level for more than three and a half year. The previous high was 1.005 million tons in late May, 2014. Port inventory remained at the neutral range of 700-900kt before 2015, with price went against the inventory level. However, China domestic output increased accompanied by decreasing import dependency since 2016, the neutral range for port inventory decreased to 600-800kt. Higher inventories weighed on demand as buyers sought to buy on a need-to basis.

Looking ahead, domestic supply will increase as many new units are expected to come online. The new units include CSPC, ECO, CNSG Hongsifang, XPCC Tianying, and Qianxi. The upcoming supply-demand situation is very similar with the condition in 2015 given the startups of Sanjiang, FREP, XInhang, Huaian and Tianye started. While polyester industry was quite weak in 2015. MEG prices fell rapidly after May 2015 due to decline in crude oil, weakening demand, and bearish sentiment. The current situation in MEG market still has some differences compared with 2015, but will tend to be with more similarities.

Risks are accumulating in both MEG or polyester markets, and the bearish factors are becoming more certain. MEG prices may weaken further and June average price may be probably lower than May's.
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