China's MEG drops more than 3 pct with new unit commissioning

Zhejiang Petroleum & Chemical Co., Ltd (ZPC) has fed ethylene into its 800kt/year MEG unit of Phase II last weekend, and is expected to get MEG products in the coming days. The unit was originally planned to start in late May, but the startup was delayed for several times. Market sentiment weakened apparently Monday with spot MEG down more than 3% from 5,070-5,080yuan/mt last Friday to around 4,900yuan/mt Monday. 

DCE MEG futures for Sep 2021 contract opened at 5,040yuan/mt Monday and fluctuated to close at 4,818yuan/mt, down 177yuan/mt or 3.54% from the previous settlement of 4,995yuan/mt. The open interest decreased by 15,420 lots to 250,660 lots, and trading volume totals 506,250 lots.

China domestic MEG supply will gradually increase after the new unit running stably. Meanwhile, with the restarts of Sinopec ZRCC, CNSG Hongsifang and Shanxi Woneng, MEG plant operating rate will also recover. Sinopec Shanghai Petrochemical will restart its 380kt/year No.2 unit this Wednesday. After that, operating rate of MEG plants in China will recovery to around 68%. However, given the turnarounds of around 700kt/year capacities (Yangmei Shouyang, CNSG Hongsifang and HNEC Yongcheng #2) in the first half of June, the continuous recovery would be limited. In addition, eyes could also rest on the restart of Qianxi Coal Chemical. 

In fundamentals, total MEG inventory will increase in June, but the increase would be relatively limited. Port inventory is recovering on intensive arrivals of imported cargoes. However, effective output increment still depends on whether ZPC II 800kt/year unit could run stably. In terms of coal-based MEG, Inner Mongolia Jianyuan and Hubei Saning are still testing their units and the output would be limited within June. The over-supply would be around 50-60kt based on 90% forecast for June average polyester polymerization rate. Focus could be on polyester operations. 

MEG market sentiment is apparently weighed by new capacities in June-July. However, crude oil prices remain firm, and MEG prices are around the break-even line of naphtha-integrated producers. The market could find supports from firm oil prices and limited inventory buildup. Some traders who have contract supply could purchase as the current price is lower than MTD average. If oil prices decrease, MEG may move down further due to lower costs. Eyes could rest on new unit getting products and oil price changes.