MEG: Profit recovery and the question of inventory decline expectations

Since December last year, MEG prices have broken away from the bottom range and embarked on an upward trend, briefly becoming one of the brightest performers at the start of 2024. The market saw a record increase of 100,000 contracts in a day. The EG2405 contract once rose above 4,750 yuan/mt, rebounding by more than 600 yuan/mt. However, as prices climbed, MEG profits rapidly recovered, leading to the return of supply from several domestic ethylene-based MEG units, such as Satellite Petrochemical, Shenghong Petrochemical, Hainan Refining & Chemical, and Far Eastern Union. The daily production of several mainstream units increased by more than 1,700 tons/day, equivalent to an annual capacity of 600-700 kt. The rise in MEG prices also narrowed the EO-EG price gap, prompting some units to switch back to EG, though the impact of this shift is currently limited. The extent of this impact during the Spring Festival period warrants attention.

In the coal chemical sector, the restart of units in winter faces practical difficulties, so the recovery of syngas-based MEG production is relatively slow. This impact might intensify after March. In the short term, it's important to note that with the restart of one line of maintenance works by SHCCIG Yulin Chemical, the supply and circulation of syngas-based products will increase. If Tianye and Yankuang units resume normal operations, the offtake at the ports is likely to decrease.

Overall, the current fundamentals of MEG are still robust. The visible benefits of the early stage are becoming apparent, and port inventories are in a phase of accelerated reduction, leading to a stronger spot basis. However, some latent pressures are emerging. According to the current pace of supply return and adjustments to the balance sheet, the first quarter will only show a slight inventory reduction, with inventory accumulation expected in February.