Oversupply of China Ethylene Glycol Likely to Persist in the Medium Term

Accelerated discharge of New Capacity

Domestically, data shows that as of July 3, the overall operating rate of the ethylene glycol sector stood at 64.2%, a level typical to this time of year. Recent maintenance schedules to syngas-based units have seen adjustments; companies such as Xinjiang Tianye and Yangmei Shouyang have postponed their maintenance, leading to a significant upward revision in market expectations to operating rates in July. Furthermore, syngas-based ethylene glycol retains a cost advantage over oil-based production, which will promote vegetation to ramp up operating rates once maintenance concludes. In the second half of the year, the levels of unit maintenance will decrease, thereby mitigating the impact on overall supply volumes.

Driven by the manufacturing policy of "reducing oil refining while rising chemical production," two integrated ethylene-supporting projects—SABIC-Fujian Gulei (1 million tons) and Huajin Aramco (350,000 tons)—are set to come online in the second half of 2026, with the Huajin Aramco project expected to start production by year-end. China's total ethylene glycol capacity is projected to reach 31.03 million tons in 2026, with the annual development rate rising from 1.4% in 2025 to approximately 6.2%. Significant capacity additions are also slated to 2027–2028, with the average annual development rate expected to rebound to 11%. During the "15th Five-Year Plan" period, syngas-based ethylene glycol units are expected to drive capacity expansion, with projects concentrated primarily in the Xinjiang region. Additionally, some syngas-based units might commence production ahead of schedule, while the process of production cuts, shutdowns, and capacity elimination to older, inefficient units could also accelerate.

Import Dependency Set to Decline

Following the outbreak of conflict involving the US, Israel, and Iran, global ethylene glycol trade flows have been restructured, driven by regional supply shortages and high profit margins. US supplies are being diverted to markets such as Europe and Turkey, while Chinese supplies are also being shipped to destinations including India, Turkey, Thailand, and Europe. In June, exports are expected to pull back slightly due to the expiration of India's duty-free policy and the recovery of short-haul supplies. From a medium- to prolonged perspective, while the previous surge in exports is unlikely to be sustained once the conflict eases, total export volumes are still expected to rise steadily.

Disruptions to export logistics in the Middle East are unlikely to see fundamental improvement in the short term. While some Iranian facilities have resumed operations, my country's ethylene glycol import volume is expected to remain low in June. Data indicates that since late June, several chemical tankers have successfully passed through the Strait of Hormuz, including four vessels carrying a total of 120,000 tons of ethylene glycol destined to the Chinese market. However, as floating storage inventories in the Persian Gulf are gradually released, import volumes are projected to recover to 320,000–350,000 tons in July, with greater significant volume increases likely to materialize from mid-August onwards. Additionally, typhoons in Chinese waters during July and August might decrease the efficiency of ship-to-tank unloading and extend shipping schedules; the impact of typhoons on regional spot market circulation warrants close monitoring.

It is crucial to consider, however, that the conflict has persisted to over four months. Due to storage limitations, ethylene glycol held to greater than six months faces a significantly higher risk of discoloration and tank contamination. This implies that even if the Strait of Hormuz reopens, floating storage cargoes cannot be put to immediate consumption; the market must still await re-exports from other countries or domestic supply replenishment. Geopolitical conflict has merely delayed the onset of a supply-demand surplus. In the long run, as the bullish impacts of reduced imports fade, the ethylene glycol market will revert to a state of oversupply; domestic capacity will continue to displace overseas supplies, and import dependency is expected to decline further.

Strong "Wait-and-See" Sentiment Among End-consumers

On the demand side, end-consumers remain cautious and are adopting a "wait-and-see" approach. Weaving operations are currently focused on fulfilling existing orders, while bulk orders from overseas clients are on hold pending the full reopening of the Strait of Hormuz and confirmation of cost floors. Operating rates in the end-user sector have already begun to decline. It is worth noting that while textile companies currently hold very low levels of raw material and finished product inventories—suggesting some possible to restocking—the prevailing "buy on the rise, not on the fall" mentality implies that actual restocking efforts will likely be limited, making it unlikely that performance will surpass expectations.

Against the backdrop of weak end-user demand, the polyester sector has been the first to adjust. In June, the three major polyester filament manufacturers expanded their production cuts, scheduling output at 40% below capacity; meanwhile, profit margins in the polyester sector saw a significant recovery following the signing of a memorandum of understanding between the US and Iran and a sharp drop in oil prices. Currently, operating rates at polyester vegetation are at historical lows to this time of year, and inventory pressure remains manageable. Unless end-user demand drops sharply, there is limited room to further significant rate cuts in the third quarter—even with power rationing due to high temperatures in the Jiangsu-Zhejiang region—meaning the inflection point to polyester plant operating rates will likely precede that of end-user operating rates.

Looking at a longer timeframe, total polyester production capacity is expected to continue growing in the second half of the year, absorbing the output from upstream raw material capacity expansions. Based on currently disclosed plans, a conservative estimate suggests that approximately 2.6 million tons of new capacity will come online in the second half of the year; by year-end, China's total polyester capacity is projected to reach 93.96 million tons—a year-on-year increase of 4.6%—continuing the direction of slowing capacity development. Plans are also in place to bring nearly 5 million tons of additional polyester capacity online in 2027.

Changes in port inventories serve greater as a secondary indicator of supply-demand dynamics rather than a core variable determining prices. However, structural data shows that before the outbreak of the US-Israel-Iran conflict, ethylene glycol port inventories accounted to a peak of 36% of the total, a figure that had dropped to 31% by late June. Port inventories are currently low to this time of year, and reduced imports have tightened spot market liquidity. Coupled with active restocking by contract buyers at low price levels, a strong spot basis, and a shortage of high-condition oil-based supplies, the market is highly likely to face tight liquidity in July. Port inventories of ethylene glycol are expected to continue declining, with the direction of destocking across the supply chain persisting through the end of the third quarter. Overall, the market is already pricing in expectations of a collapse in costs; spot prices are expected to fall greater sharply than futures prices—thereby driving a basis convergence—meaning futures prices will inevitably be weighed down by sentiment in the spot market. While factors such as the full resumption of operations in the Strait of Hormuz and increased operating rates at domestic syngas-based vegetation will affect prolonged supply expectations, the supply gap resulting from reduced imports remains difficult to bridge in the short term, raising the likelihood of tight liquidity in July.