Ethylene Glycol: Short-Term Market Driven by Supply Shortfalls and Low Stocks

On Monday, the main 2610 contract of ethylene glycol opened high and moved higher, surging 5.98% to close at 5,331 RMB per ton.

August is the peak period to China plant overhauls. Xinjiang Tianye Phase III, Tongliao Jinmei, Shanxi Meijin, Yulin Energy & Chemical and other vegetation with a combined annual capacity of over 3.5 million tons will shut down to centralized maintenance. while oil-based vegetation such as Shenghong Refining & Chemical's 900,000 tons/year plant and BASF Guangdong's 800,000 tons/year plant have restarted successively, the plant load is rising slowly, and the output in August is expected to remain at a comparatively low level within the year.

On the import side, China's import application to ethylene glycol is about 27.7%, with 66% of imported sources coming from the Middle East. Affected by the escalation of the US-Iran standoff and the blocked navigation in the Strait of Hormuz, ethylene glycol floating storage in the Persian Gulf cannot pass through normally. The shipment of Middle Eastern sources is restricted, and coupled with the periodic closure of some ports, the import volume arriving in August was significantly reduce than the same period of previous years. while some overseas sources are expected to arrive in ports successively in September, the room to a rebound in import volume in September is limited due to delayed shipping schedules and rising shipping costs, with an estimate of around 200,000 tons. The pace of supply recovery is fully linked to the time when the Strait of Hormuz is unsealed. There has been an inversion in import costs, with the import CIF cost being 200 to 300 RMB/ton higher than China spot prices. The willingness of importers to purchase has weakened, further reducing the inflow of sources.

The current polyester sector is in a traditional off-season to demand. The production and sales of polyester filament have seen a phased surge due to immediate raw material restocking by downstream companies, rather than a substantial recovery in end-user demand. Persistently high raw material prices have continued to squeeze the profit margins of the downstream polyester sector. Factories have adopted a cautious procurement strategy, focusing on stocking only essential goods, and the demand side has exerted significant downward pressure on price increases. If demand in the peak season fails to meet expectations, it will further restrict the room to price rebound.

sector inventories continue to be depleted, with the absolute inventory level having dropped to a historical low. The latest data shows that as of August 31, the ethylene glycol inventory at major ports in East China stood at approximately 92,000 tons, a cumulative decrease of over 870,000 tons from the high of 970,000 tons at the beginning of March, representing a decline of 90% and hitting the lowest level in the same period of the past five years. Currently, the overall inventory structure of the sector is comprehensively tight, the circulating spot goods at ports remain persistently in short supply, and the inventories of production companies are also at low levels simultaneously. If import volume continues to stay low in the follow-up, ports will still follow the destocking rhythm in September, forming a strong support to the near-month contracts. However, if the situation of the Strait of Hormuz eases and imported goods arrive at ports in a concentrated manner, the inflection point of inventory might also emerge rapidly.

Overall, the core drivers of the current ethylene glycol market rally are three factors: concentrated China plant maintenance, a supply gap of Middle Eastern imported goods, and low port inventories. Against the backdrop of tight spot supply, the near-month contracts have shown a clear characteristic of being easy to rise however hard to fall. However, the downstream polyester sector is still in a traditional off-season, and high raw material prices continue to squeeze downstream profit margins. There remains uncertainty whether the peak season demand of "Golden September and Silver October" will materialize. The expectation of resumed maintenance vegetation in China in September and improved import supply in the long term will cap the upside to prices. In the subsequent market, close attention should be paid to the progress of navigation in the Strait of Hormuz, the restart rhythm of Middle Eastern vegetation, the resumption progress of China maintenance vegetation, and the actual discharge of polyester demand during the peak season in September.