MEG Capacity Expansion Weakens Inventory Influence on Price
China’s MEG supply capacity and volume has increased quickly since 2020 when a new round of capacity expansion started. In 2022, the MEG capacity expansion exerted more obvious influences on the industry operation and market prices. With the MEG supply capacity rising steadily, the influence of inventory, the dominant indicator of supply-demand structure, on market prices began to weaken.
In 2022, the MEG production cost kept advancing due to the quick price rise of crude oil at the beginning of the year and firm chemical-use coal prices. However, the MEG demand underperformed, restricting its cost transmission to downstream products. As a result, the profit from producing MEG was cut to a large extent.
In 2022, most MEG producers suffered profit losses. For example, the profit from producing MEG via syngas-route dropped from around RMB 500/mt at the end of 2021 to around RMB -1,600/mt in Q4, 2022.
On the one hand, although the industrial profit fell heavily, the monthly output of MEG was maintained at over 1,000kt in 2022. The major reason is that after the quick capacity expansion in recent three years, current major MEG producers are large-scale refining & petrochemical complexes or large-scale coal chemical enterprises which pay more attention to the overall profit and production safety & stability during the operation, so the profit of single MEG unit is less important. Therefore, although the industrial profit remained negative for a long time, the MEG supply and stability were improved greatly.
On the other hand, the correlation degree between MEG price and supply-demand structure & inventory declined, as the logic of “price drop-profit decline-supply reduction-inventory decrease-price rise-profit growth-supply increase-price drop” was broken.
In addition, the soft demand also dented the affect of MEG output reduction on supply-demand structure. The MEG inventory decline was below market expectation, failing to boost MEG prices. At the end of August, the port inventory of MEG was around 1,070kt in East China, and the spot price of MEG was over RMB 4,000/mt in Zhangjiagang market. In late October, the port inventory fell to around 840kt, while the spot price dropped to around RMB 3,900/mt.
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