Cost vs. supply: MEG stuck in a volatile stagnation

Recently, crude oil futures have remained strong, largely driven by supply-side concerns-particularly investor worries that Iran and Russia may face sanctions. Despite the impending Spring Festival, the polyester industry and its downstream sectors have shown notable resilience, with milder-than-expected drops in operating rates and inventory pressure compared to previous years.

Evidence can be seen in the MEG offtaking data at East China ports: in the first half of January, daily shipments at three terminals in Zhangjiagang and Taicang averaged around 12kt-already higher than the 2024 full-year average for these facilities.

Regarding polyester plant operations during the Spring Festival, the period from late January to early February marks a temporary low in industry capacity utilization. Currently, the domestic polyester operating rate stands at about 83.6%. Projections suggest that the lowest point will occur around Chinese New Year's Eve, dipping to roughly 81%.

Nevertheless, while cost pressures are rising and demand is stronger than expected, MEG's own supply in December and January has exerted varying degrees of pressure. In December, domestic production approached 1.8 million tons, a record high. In January, the main pressure comes from ongoing cargo arrivals by sea. According to current vessel data, imports could reach around 750kt this month-the highest level since mid-2023. Notably, one major storage facility in Zhangjiagang saw its inventory climb from around 110kt at the end of December to 240kt currently, with further increases expected over the next two weeks. February import arrivals and schedules bear close watching.

Overall, we believe that any clear price trend in MEG will require new drivers or more favorable timing. This week and next, polyester operating rates are still on a downward path, and the arrival of additional cargoes at terminals in the coming two weeks will be considerable. Meanwhile, most market participants are reluctant to hold cargoes over the holiday, so keep an eye on changes in spot price differentials. In the short term, we anticipate MEG will remain range-bound between 4,700 and 4,900 yuan/mt.