2024 anticipated to witness the best MEG supply-demand structure since 2020

In the last two years, discussions around Ethylene Glycol (MEG) in China have focused on its undervaluation, high inventory levels, and surplus. However, as China's capacity expansion cycle draws to a close and some facilities exit the market due to cost competition, we expect the market structure for MEG to improve between 2024 and 2025 compared to the 2022-2023 period.

Supply Dynamics: Growth in supply is anticipated to slow, with limited expectations for new capacity to come online.

For 2024, while there are a number of new plants scheduled to commence production, only two are likely to actualize production before the EG2409 contract period: Yuneng Chemical's 400kt/year facility and Zhongkun's 600kt/year facility. Other planned capacities face delays or uncertainties.

There are no new capacities planned outside China for next year.

Particularly of interest is the Shandong Yulong Petrochemical's plant with an annual capacity of 800kt/year. According to public records, this facility completed the installation of EO/EG equipment in end-October 2023. However, due to market prospects and profitability pressures, the company may slow construction or consider an alternative polyethylene (PE) project. Looking at the timeline of the recently operational Sanjiang Chemical plant, which took over two years from equipment installation to commencement, including approximately six months of COVID-19 impacts, we can expect the Yulong project may also need around a year before starting up. Hence, its production contribution in 2023 is expected to be minimal.

Zhonghuaxue's project is actively progressing, but due to slow public utility infrastructure development, the company has indicated a delay until the second half of 2024. Since this project has been on hold for seven years, its actual restart progress merits close monitoring. The Kunpeng project's infrastructure construction is complete, but due to economic viability concerns, there is no clear timeline for operation commencement.

Production Outlook: The shift of existing facilities to other products will continue, with annual production growth rates expected to reach the lowest point since 2019.

After enduring prolonged periods of low pricing, traditional petrochemical companies in China, such as BASF-YPC, Zhenhai Refining & Chemical, Satellite Petrochemical, and Hengli Petrochemical, initiated EO/EG conversion in the second half of 2022. However, due to relatively weak demand for ethylene oxide (EO), the scope for EO/EG conversion has been limited, with most conversions realized in enterprises with EO downstream facilities. For instance, Satellite Petrochemical shut down one of its EG units at the end of July 2023, and Hengli Petrochemical reduced its operating rate to convert to ethanolamines from mid-September 2023. In 2024, such adjustments are expected to progress further, with plans for further MEG production cuts and the planned commissioning of a Dimethyl Carbonate (DMC) facility by Hengli Petrochemical.

Moreover, coal-based producers like Hubei Sanning could potentially shut down their MEG units completely by 2024 following technological upgrades. Nevertheless, the output from coal-based MEG producers is still expected to maintain a steady growth trajectory, subject to ongoing follow-up.

Import Landscape: Overseas production is operating at high rates, leaving limited room for incremental increases.

The major challenge faced by the MEG market abroad this year includes the incremental capacity from two new facilities and the high operational rates of existing plants, particularly in North America, coupled with subdued demand due to economic pressures in Europe and United States, as well as India's implementation of BIS standards. North American ethane prices suggest a strong cost advantage for their petrochemicals globally, leading to significant MEG exports to China starting in the third quarter of 2023. This has resulted in a noticeable increase in visible inventory in the Chinese market recently.

Additionally, facilities in Kuwait and Canada are also operating at favorable rates. Although predictions on next year's energy mix and overseas operational rates are currently uncertain, it is anticipated that supply volumes may see a reduction, warranting attention to overseas plants' maintenance schedules and contract negotiations.

Based on these trends, we project that the MEG supply-demand structure will improve in 2024, with an estimated inventory reduction of 300-400kt (assuming a 5.5% growth in polyester production). This would position 2024 as potentially the year with the best supply-demand dynamics since at least 2020, if not since 2017.