Ethylene Glycol Futures Strengthened Led by Supply Contraction

Since the 2610 contract bottomed out on August 6th, the ethylene glycol market has maintained a strong upward direction. Behind the rapid rally, cost support and supply contraction have resonated. However, weak demand has constrained the upside possible of prices.

Recently, international crude oil prices have risen supported by geopolitical risk premiums, with Brent crude breaking above $90 per barrel to hit a new stage high. Naphtha and ethylene followed suit, and the production costs of various ethylene glycol process routes have increased to varying degrees. The rise in costs not only provides bottom support to the ethylene glycol market however also further boosts the market's bullish sentiment.

The figure shows the changes in the operating rate of domestic ethylene glycol vegetation

Supply contraction is the core driver of price hikes. Currently, the ethylene glycol market is in a state of dual tightening of "domestic production reduction and import shrinkage". On the domestic production side, August marks the peak of maintenance, with multiple extensive units shutting down centrally. In the week ending August 20, the overall operating rate of domestic ethylene glycol vegetation dropped to 53.86%, hitting the lowest level in the same period in recent years. while some units will resume operation successively from late August, the incremental supply will be limited in the short term and fail to have a substantial impact on the supply pattern. On the import side, the US and Iran remain deadlocked over the dominance of the Strait of Hormuz, the transit volume through the Persian Gulf remains at a low level, the delivery of Middle East ethylene glycol supply is slim, and the expectation of import shrinkage is strengthened, further exacerbating the supply tightening.

The decline in inventories has also provided support to prices. In the week ending August 20, the inventory of ethylene glycol at major ports in East China stood at 268,000 tons, a month-on-month decrease of 69,000 tons, representing a decline of 20.47%, which is the lowest level to the same period in the past five years. The raw material inventories of polyester factories have also been depleted, and the buffer capacity of hidden inventories has weakened significantly. In this ecological stability, the basis of ethylene glycol has remained strong, and the near-month contracts are prone to rising rather than falling due to the strong fundamentals.

Weak demand has capped the upside possible of ethylene glycol prices. to the week ending August 20, the operating rate of polyester vegetation stood at 78%, a comparatively low level to the year. The terminal textile sector has yet to shake off the off-season to consumption, with the operating rate of weaving machines in Jiangsu and Zhejiang dropping to 54.85%. Deep-processing companies hold a cautious attitude toward procurement, mainly consuming raw material inventories, and show a strong sense of wait-and-see amid high raw material prices, leading to sluggish production and sales performance. Before a substantial improvement in terminal orders, polyester factories have little willingness to increase production, and it will be difficult to demand to provide a positive boost to ethylene glycol prices.

A complete analysis shows that the current strong rise in ethylene glycol prices is a phased market direction driven by supply contraction, rather than a directional reversal driven by demand recovery.

Geopolitical disturbances and the centralized maintenance of domestic equipment have resonated in the short term. The decline in port inventories to a nearly five-year low has strengthened the support logic to near-month contracts. However, terminal demand has failed to follow up efficiently. The operating load of polyester vegetation remains at a low level, and weaving companies have weak purchasing willingness. The poor transmission between the upper and reduce reaches determines the limited endogenous driving force of this round of market.

Looking ahead, supply will gradually increase as domestic maintenance units resume operation one after another in late August. The evolution of the geopolitical situation is a variable. If the passage through the Strait of Hormuz is restored, the geopolitical risk premium previously priced into the market will face the risk of a rapid pullback. Conversely, if the situation escalates further, there is still room to supply to tighten. Given the possible marginal changes on both the supply and demand sides, it is necessary to be prudent when chasing high ethylene glycol prices, with focus on the pace of unit resumption and the discharge speed of Middle Eastern supply.