Polyester rate cuts exceed expectations, pressuring MEG market

The operating rate for polyester plants in China has seen a decline from previous highs, with the current rate adjusted to 89.3%, nearly 4 percentage points lower than at April's end, primarily due to boiler renovations and equipment failures in Zhejiang-based companies. This downward trend is expected to continue, especially if companies like Tongkun, Xinfengming, and Shenghong proceed with anticipated production cuts.

These potential reductions have influenced the MEG futures market, which has unexpectedly weakened, contradicting earlier expectations of firmer prices driven by supply-demand contractions and accelerated port offloading in May. Since late April, the EG2409 contract has dropped from a high of 4,500-4,600 yuan/mt, affected more by macroeconomic factors and inter-commodity positioning than by EG fundamentals themselves, which remain relatively neutral.

From a supply-demand viewpoint, May continues to be a destocking phase, offering a slightly optimistic outlook. The syngas-based MEG unit operating rate is projected to increase to around 70% by late May, with operations such as Xinjiang Zhongkun ramping up. The 800kt/year ZPC #3, shut for maintenance, is also slated to restart. Despite uncertainties about its post-restart performance, it highlights the difficulty MEG suppliers face in reducing capacity through short-term shutdowns.

In terms of inventories, major port offtakes has accelerated, maintaining a rate of 8,000-9,000 tons/day. Inventory in East China main port somewhat compressed but still moderately high at about 440kt as of May 10. The focus remains on whether reductions to the 350-400kt range can be sustained.

Looking ahead to the third quarter, MEG capacity appears slightly excessive, with the market potentially stabilizing only if there are unexpected operational cutbacks or reduced imports. Additionally, the profitability of domestic EO facilities, influenced by falling naphtha and ethylene prices, will continue to be a key factor, particularly with the summer coal usage and supply margins in the coal chemical sector warranting close monitoring.