MEG inventories fall to multi-year lows, polyester cuts loom

Strait blockades lock In low MEG imports

The continued dual blockade of the Strait of Hormuz and the Bab el-Mandeb Strait has effectively fixed MEG import volumes at low levels for August and September. That leaves little room for restocking, and inventories are expected to keep declining across both months.

As of now, China's total MEG inventories and visible inventories have both fallen to multi-year lows, leaving very limited buffer for downstream users.

Polyester producers cut rates on MEG shortage

Higher raw material costs and the MEG shortage have triggered a run of production-cut announcements in the PET bottle chip and PSF sectors. The PFY segment is holding up better: sales during the week were reasonably strong and margins were acceptable, so PFY operating rates are staying firm in the short term.

On that basis, the polyester comprehensive operating rate is expected to fall to around 81% this week.

If Middle East supply stays impaired, domestic polyester plants will keep cutting output because of the MEG shortage. Our tentative estimate is a September monthly average polyester operating rate near 79%, and a lower figure cannot be ruled out in an extreme scenario.

MEG is now the supply bottleneck of the polyester chain

MEG has become the supply bottleneck for the polyester chain, and the extent of any recovery in polyester operating rates further out depends largely on whether MEG supply increases. If Middle East MEG shipments to China stay at low levels, the MEG market will gradually move toward a forced supply-demand balance from September onward. If the straits reopen, the MEG supply-demand structure would gradually reverse.

Where additional MEG supply could come from

Supply from domestic sources and from other overseas regions is likely to add volume only gradually, trading time for space rather than delivering an immediate fix.

A 360kt/year MEG unit in Taiwan is scheduled to restart in early September. The unit has been shut since the beginning of this year.

The operating rate of syngas-based MEG is expected to rise to 85% or above around late September. Restart progress at Tianying and Xinrun is also worth monitoring.

For conventional units, rising MEG prices have improved the economics of EG relative to EO, so there is scope to switch production toward MEG. With materials generally tight, however, the room for adjustment is likely to be smaller than in previous years.

Outlook

In the short term, low import arrivals and multi-year-low inventories keep the MEG market tight, and polyester operating rates are set to stay under passive pressure, with the comprehensive rate around 81% this week and near 79% on a September average.

Over the medium term, the direction depends on Middle East supply. Sustained low shipments to China would push MEG toward a forced supply-demand balance from September, while a reopening of the straits would gradually reverse the current structure. Incremental supply from the Taiwanese restart, higher syngas-based operating rates and EO/EG switching should arrive only gradually.