MEG demand weakens but overseas supply tightness continues

MEG buying sentiment remains weak in China recently due to polyester output reduction. MEG prices have seen rebound this week on the back of rising oil prices, but the durability of persistent buying is hard to sustain. Spot-futures spread is only around 35-45yuan/mt.

Downstream mills are facing increasing inventory pressure as export orders have been put forward and export loadings are stagnated. In terms of domestic sales, most mills have not received new orders. Polyester sales ratio remains weak on cautious buying and polyester product inventories stand high.

However, supply outside China has been in tightness for a while.

A few producers in Saudi Arabia unexpectedly shut down plants for days or cut operating rates, leading to apparent output loss. Overall supply is likely to keep tight in the fourth quarter. Meanwhile, operating rate in Kuwait and Iran remains low due to ethane shortage. August Iran loading cargoes have been delayed to September and the arrival in China will be also delayed. Looking ahead, supply from the Middle East will keep low and eye could rest on the startup of JUPC3.

MEG prices stand high on healthy demand and are likely to keep firm amid maintenance plan of Lotte Chemical Louisiana plant in the United Sates and low operating rate in Saudi Arabia. Recently, more enquiries for China re-exports emerged and short-sea cargoes were shipped to Europe. However, overall transactions for exports were limited restricted by the tightness of pilot vessels in East China ports. Exports from the US to China will be also low given maintenance plants of Nan Ya #2 and Lotte Chemical in October. MEGlobal will have some contract supply to China but with limited volumes.

In Northeast Asia, operating rate in Japan and South Korea has increased with improving production margins. Supply from Japan and South Korea to China will increase to around 15-20kt in September. In addition, given higher prices in European market, cargoes will be also shipped to Europe.

In general, overall supply outside China will keep tight. Northeast Asian cargoes could offset some output losses but with limited volumes. Currently, the focus in China's MEG market is whether the demand could recover and further polyester output cut. Polyester sales ratio remains weak and end-user market improvement has uncertainties. MEG prices are likely to keep fluctuating in short term.