MEG import hits yearly high, weaker supply-demand in H2

China domestic polyester operating rates have remained high since March this year, with monthly polyester output increasing considerably. Polyester production from January to July increased 9-10% year-on-year, reflecting strong post-pandemic demand recovery in the polyester segment. Currently, domestic polyester operating rates still hover around 93%, and there are no apparent tensions in downstream segments of the industry chain. Reduced operating rates driven by the industry itself are not strong forces in the short term. The key focus for the market in September and October will be policies impacting polyester producers near Hangzhou during the Asian Games.

Behind the significant increase in polyester output, China's 2023 demand structure has changed somewhat, especially with a noticeable rise in PFY exports. These exports have displaced some overseas polyester capacity, and we have learned that some overseas customers are seeing local polyester plants cut production. Consequently, some overseas MEG supply flowed into China in Q2 and Q3, after China's MEG imports hit record lows in March and April.

Regarding earlier rumors of Canadian MEG supply loss due to port strikes, we understand the strikes eased in late July. Polyester producers with Canadian MEG contracts have received loading information, and a batch loaded in late July. With approximately one month shipping time, Canadian MEG should arrive in China in late August. So Canadian supply has not been substantively impacted, though some shipments were delayed 7-10 days. Loading now appears to be normalizing.

Recent data indicates July-September will be the peak import period this year. July imports are estimated around 650kt. Over 400kt had arrived at major ports by mid-August, and adding late August and volumes in non-mainstream ports, August imports are expected to exceed 700kt barring port congestion or customs delays.

Apart from overseas MEG demand displaced by China's exports, global MEG supply also seems to be increasing as weak ethylene economics improve MEG production margins. China's H1 MEG supply squeezed out imports and drew down inventories, while overseas markets saw supply rebounds and restocking.

For MEG futures, the September contract faces real pressure from massive arrivals and inventories. The January 2024 contract has risks like the restart of Shenghong's 1 million mt/year #1 unit, cancelled maintenance plans at SHCCIG Yulin Chemical's 1.8 million mt/year plant, upcoming startups of 600kt/year from Zhongkun New Materials and 400kt/year from Yuneng Chemical Materials, and potential polyester operating rate reductions. Although MEG valuations are low now, short positions or bearish stances on rallies may still be prudent.