EO and EG both weaken, output diversion slows down

MEG prices fell in the week of May 15-19, following declines in coal and commodity prices. However, the decrease was smaller than for other commodities supported by higher polyester polymerization rate, good PFY sales ratio and lower inventory.

However, the market posted a further decline on May 22 on the increased port inventory and startup of Sanjiang Chemical. MEG tank inventory in East China main ports increased 46kt week-on-week to about 1.06 million tons on May 22 with the arrival of U.S. cargoes and smooth discharges. Port inventory is expected to decrease next week with fewer shipments arriving this week.

 Sanjiang Chemical started its light hydrocarbon cracker in Jiaxing, Zhejiang province, and obtained on-spec ethylene over the weekend ended May 19. The cracker is now running smoothly. Sanjiang fed ethylene to its MEG plant last weekend and is expected to get MEG in a few days. The plant has a nameplate MEG capacity of 1 million mt/year and could flexibly adjust EO/EG output.

MEG supply is expected to increase. Malaysia's PRefChem restarted its 750kt/year MEG plant in Pengerang last weekend. Eyes could rest on the stability of the operation. In China domestic market, SHCCIG Yulin Chemical and Weihe Binzhou Chemical have restarted their units. Maintenance/restarts are mostly as planned and there are still no signs of restarts due to lower coal prices.

In addition, the increase in m-o-m production is still expected due to the delayed diversion of output. EO prices have recently hovered around 6,500yuan/mt in East China and actual traded prices could be even lower as downstream water-reducing admixture producers are running at low rate and inactive to buy EO due to weak demand due to the slow recovery in the real estate market. EO/1.25*EG spread has also narrowed.

The start-up of Hengli Petrochemical's ethanol amine (EOA) unit has been postponed to the end of July and the EO/EG switch will also be postponed to the end of July. Satellite Petrochemical has one MEG line under maintenance for one month and plans to switch to EO production after maintenance. However, the diversion of production still depends on the performance of the EO market, and some producers may also increase EG production in June-July due to the off-season of EO.

Meanwhile, some producers will also increase the crack rate of the stream cracker with widening ethylene-naphtha spread. Gulei petrochemical originally planned to lower EG rate after the startup of EVA unit. However, Gulei has increased the operating rate of its cracker and the MEG unit operating rate remains high. And with the increased cash flow, we should also pay attention to the possible restarts in Asian market.

MEG demand is also increasing. The polyester plant operating rate rose to about 89% last Friday. We've also revised our forecast for May average rate to about 88.5%. The estimated operating rates of polyester plants for June and July are 86% and 87%.

On top of these estimates for MEG supply and demand, total MEG inventory is expected to decrease by more than 200kt in May. The market is expected to be broadly balanced in June-July.

Fundamentally, MEG market could still find support. However, Sanjiang's start-up and weak coal and macroeconomic conditions are still putting pressure on the market. Eyes could rest on the operating rate of polyester plants, the macro environment and commodity price movements.