MEG supply-demand structure to improve in Q1 2024

MEG prices were relatively firm last week due to its neutral fundamentals and low valuation, despite the weakness in commodity market. In the latter half of the week, positive signs emerged with reduced import volumes, improved port offtake, and production cuts at Yulin Chemical and Xinjiang Tianye. However, high inventory levels continued to suppress market sentiment, leading to weakening spot basis.

In the context of shrinking import expectations, continuous squeezing out of domestic capacity, and strong support from industrial rigid demand, the MEG market, which has already experienced the industry's trough, may improve in 2024.

MEG imports from U.S. and Saudi Arabia to see notable decrease in Q1 2024

Due to increased shipping costs caused by the Panama Canal congestion, Nan Ya shut down its 828kt/year MEG unit in early December. At the same time, a smaller 360kt/year unit was restarted to alleviate sales and inventory pressures. Some suppliers have changed their shipping routes, which, in the short term, has increased transportation time, effectively reducing shipping capacity. Market transactions indicate that from October onwards, some U.S. goods suppliers have temporarily ceased sales to China. It is expected that from December to February, the average monthly arrival of American goods will be reduced to a range of 20-50kt.

In Saudi Arabia, some high-cost plants, such as Sharq 3-4 have reduced the operating rates due to a lack of raw materials. Additionally, the Sharq 1-2 plants have been shut down since mid-October and are planned to restart around the end of the year. However, in January, the upstream ethylene plants for these two units have a planned shutdown for maintenance, so Sharq 1-2, each with a capacity of 450kt/year, will continue to be shut down in January and February. This supply loss will persist into the first quarter of next year. Furthermore, two JUPC units in Saudi Arabia were heard have been shut down, involving a capacity of 1.3-1.4 million mt/year. There are still plans for further shutdowns of other capacities in the Saudi Arabia. Therefore, we are lowering the import volume estimate for the Middle East to below 250kt tons per month for January and February (a conservative estimate, not ruling out lower figures).

In the South Korean market, Lotte's #1 300kt/year MEG unit has been shut down since mid-March, and was scheduled to restart at the end of 2023 for EO production; Then Lotte Chemical plans to shut its #2 400kt/year unit at Daesan.

In summary, we are temporarily revising down the import volume for Q1 2024 to 500-550kt.

China domestic supply:

Operating rate of coal-based MEG units in China apparently decreased last week due to the planned shutdown of Yulin Chemical and the rate cut of Xinjiang Tianye. In addition, Hubei Sanning might switch production in the first quarter of the next year, which could reduce MEG output by about 30% of its capacity. The output from Yuneng and Zhongkun could offset some production loss.

Demand:

The estimated average monthly rate for polyester units from December to February is projected at 90.3%, 89.6%, and 86.6%, respectively. The rigid demand support for MEG remains steady. Based on this, it is speculated that MEG will continue to show a de-stocking trend until the first quarter, with a cumulative de-stocking volume of about 200kt in December and January.

Under prolonged and continuous losses, even the most competitive suppliers are gradually reducing their operating rates and supply. MEG, having weathered the industry's low point, may now need to regain its confidence as it enters a new year.