MEG price up in improving supply-demand structure

Since late August, MEG prices have rebounded driven by the commodity atmosphere, with the EG2401 contract rising from CNY 4,050/mt to around CNY 4,450/mt in a month, a 10% increase. Prices quickly surged on Monday morning as port inventories declined notably, also improving sentiment among some traders. 

Looking back at this rally, it mainly started with the sequential decrease in MEG supply. With good polyester demand and positive feedback in the industry chain, the market has revised its view on the supply-demand balance in Q4 and even next year, from previous inventory build-up expectations towards a tight balance or even destocking. 

In addition, resilient energy costs, especially the recent coal price increases, have also boosted sentiment considerably. 

For non-coal based plants, some capacity cuts have occurred under persistent losses, such as Hengli Petrochemical switching to ethanolamine production directly reducing MEG output last week, and Zhejiang Petroleum & Chemical (ZPC)'s daily MEG production also declining this month. 

In summary, we believe this MEG uptrend is mainly due to the marginal supply improvement driven by chronic losses and undervaluation, coupled with rising costs and positive demand feedback. Also, shorts were previously overcrowded in MEG, increasing risk of further short positions without major negative developments fundamentally or macro-wise. Looking ahead, downside risks on the demand side from Asian Games-related shutdowns and expected bottle-grade chip production cuts should gradually ease. Key focuses are the sustainability of cost increase and the extent of MEG self-supply reductions, especially the September-October maintenance at SHCCIG Yulin Chemical, with room for continued volatile upside in MEG over September-October.