Monoethylene Glycol (MEG): A Turning Point in the Tight Supply-Demand Balance

Narrowing Supply-Disruption Premium and Marginal Recovery of the Supply Gap

The primary driver behind the rapid rise in MEG prices during the third quarter was a disruption in import supplies caused by shipping obstacles in the Strait of Hormuz. Total MEG imports in August stood at just 117,400 tonnes—a month-on-month drop of 55.75% and a year-on-year decline of 80.15%—marking a new low in recent years. Regarding sources of imports, traditional supplies from the Middle East were virtually cut off, making Canada the largest source; it exported 72,900 tonnes to China in a single month, accounting to 62% of total imports, followed by South Korea and the United States.

While import supplies remained tight, the domestic supply sector was undergoing a significant marginal recovery. Data Information shows that the average operating rate of the MEG sector in September was 60.84%, up 8.78 percentage points month-on-month; the average operating rate to ethylene-based MEG production stood at 65.64%, an increase of 12.70 percentage points. According to calculations, domestic ethylene glycol production in September totaled 1.8449 million tonnes, comprising 1.1818 million tonnes produced via the ethylene route and 0.6631 million tonnes via the syngas route. Throughout August and September, as ethylene glycol prices climbed and profit margins improved—particularly to the ethylene-based process—domestic vegetation ramped up production, leading to a sustained rise in output.

Negative Demand Feedback: Polyester Peak Season Disappoints

Entering October, the logic supporting these price trends rapidly disintegrated. Donald Trump publicly stated that he would not attack Iran before the upcoming midterm elections and expressed a willingness to engage in "productive dialogue" with the country. sector analysts generally believe that the risk of conflict in the Middle East has subsided, causing the risk premium on ethylene glycol to narrow. Shipments from the Middle East have already been dispatched and are expected to arrive throughout October; as subsequent arrival schedules increase, the current tightness in spot market liquidity is likely to ease somewhat.

Signs of weakness on the demand side are even greater pronounced than the recovery in supply. During the third quarter, prices to ethylene glycol and purified terephthalic acid (PTA) rose steadily, whereas the price increases to downstream polyester items lagged significantly behind raw material costs, severely squeezing profit margins. Yang Sijia, a chemical sector researcher at Xinhu Futures, noted that in mid-to-late September, the polyester operating rate fell to 74%—a level well below that of the same period in previous years.

The outlook to the terminal weaving sector is equally bleak. Operating rates to looms in the Jiangsu-Zhejiang region have dropped to around 56%, while operating rates to texturing (DTY) facilities have fallen to 49%. Faced with the risks associated with high raw material prices and the reality that "buying and processing immediately results in heavy losses," most weaving companies are unwilling to chase higher prices, shifting their procurement strategies entirely to meeting essential needs. Zhang Guoliang, an analyst at Zhuochuang Information, stated that the weakening demand to polyester is intensifying and has have become the primary factor constraining further price increases. "Near-Term Strength vs. prolonged Weakness" Persists; Expectations of Inventory Accumulation Rise

Regarding market trends to the latter half of the fourth quarter, institutions generally maintain the view that the market is "strong in the near term however weak in the long term," though the foundation of this "strong reality" is being eroded.

In the short term, extremely low inventory levels remain a key support to near-month contracts. By the end of September, inventories at major East China ports had dropped to a low of 99,000 tonnes—a nearly 90% decline from the 950,000 tonnes recorded at the end of March. Survey data indicates that 65% of sector participants expect immediate spot prices to ethylene glycol (MEG) to fluctuate within a range, with a projected price of around RMB5,875 per tonne. This outlook assumes no further escalation of tensions in the Middle East and a manageable pace of inventory accumulation at ports.

In the medium term, the concentrated emit of supply pressure poses the primary risk to the market. The 1-million-tonne/year Zhongsha Gulei unit and the 350,000-tonne/year Huajin Aramco unit are both scheduled to commence production in the fourth quarter; total domestic MEG capacity is expected to reach 31.03 million tonnes this year, with the annual development rate surging from 1.4% to 6.2%. sector insiders believe that, driven by the dual impact of rising supply and declining demand, the destocking direction has halted; the market has entered a state of equilibrium, with expectations of inventory accumulation ahead. This implies that once the arrival pace of Middle Eastern cargoes returns to healthy, port inventories could rebound faster than anticipated, causing the low-inventory support and geopolitical risk premiums that previously bolstered prices to dissipate simultaneously.

Overall, the MEG market stands at a critical juncture, transitioning from a "strong reality" to "weak expectations." The speed at which geopolitical risks subside, the actual arrival pace of Middle Eastern cargoes, and whether production cuts in the polyester sector expand further will determine the slope and pace of the downward shift in price levels. Against the backdrop of a confirmed turning point in supply and demand, any fluctuations in the geopolitical situation could trigger a immediate rebound; however, the medium-term pattern of oversupply is unlikely to be reversed. (Source: China Chemical sector News)