MEG futures plummet, but supply tightness continues

MEG futures at Dalian Commodity Exchange slumped Tuesday in line with the drops in chemical commodities. May delivery contract closed at 5,506yuan/mt, down 456yuan/mt or 7.65% from the previous settlement of 5,962yuan/mt. CCFGroup spot MEG index decreased by 360yuan/mt on March 9 and Mar CFR China cargo fell to around $730-740/mt. Spot/EG05 spread narrowed to 330-360yuan/mt and H2 Apr/EG05 spread was around 190-200yuan/mt.

Overall market sentiment was weak in chemical commodities in the week starting March 8. Meanwhile, the rumor that Zhejiang Petroleum & Chemical (ZPC) would start its Phase II MEG project ahead of schedule, which acted as an amplifier, accelerated the decline in MEG futures. Market participants were eager to sell in concerns of increasing supply.

ZPC Phase II has two MEG production lines with total capacity of 1.6 million mt/year. According to a company source of ZPC, the company is expected to start one line in the second half of April. However, the earliest timing for ZPC as well as Satellite and Sanning to achieve MEG would be in early May.

Some conventional producers, particularly in East China, have raised EG output in consideration of total profit of EO and EG. However, in South China, MEG operating rate of Sinochem Quanzhou and CSPC would decrease slightly.

Operating rate of coal-based MEG units remained below 70%, despite the recent recovery. MEG spot prices were firm, but few of current closed units could restart quickly. Yangmei Shenzhou, HNEC Anyang, and Hubei Chemical Fertilizer are unlikely to restart soon. Yangmei Pingding and HNEC Xinxiang have intentions to restart on improved margins. However, they are also unlikely to come back in short term given long procedure in enterprise decision and debt situation.

Shanxi Woneng Chemical plans to shut its 300kt/year coal-based MEG unit on March 26 for around 7-10 days of maintenance. HNEC shuts its 200kt/year coal-based MEG unit at Puyang site, Henan province on March 9 for maintenance. It was still unknown how long the maintenance would last. Inner Mongolia Xinhang Energy shut its MEG lines for maintenance in turns starting from March 10. Xinhang Energy has 400kt/year coal-based MEG capacity, and now the operating rate is around 50%. In addition, Qianxi Coal Chemical will also carry out maintenance to change catalyst, but the timing has not been decided.

Outside China, Iran's Farsa Chimie Co. failed to restart its 400kt/year MEG plant and shut the plant again. Restart timing has not been decided. Overall supply was still tight in US and European market. European MEG price climbed above Eur1,000/mt mark in the week ended March 5 with further uncertainty about import resupply following the cold snap's impact on USGC MEG plants seen in February. US spot export prices increased by 10 cents/lb in the week end March 5. Some Iran-origin cargoes were reallocated to Turkey and Taiwan and South Korea-origin cargoes were shipped to European and US markets.

Considering the global supply tightness, China's total MEG inventory is likely to keep decreasing in March and April. Port inventory would continue decrease and the decrease in polyester plants may accelerate on firm MEG price.