In the first half of 2020, ethylene glycol port inventories were high and prices fell sharply. This was mainly due to the substantial expansion of ethylene glycol production capacity in the context of favorable domestic policies and the U.S. shale gas revolution. With the advantages of cost and volume, the expansion of ethylene glycol production capacity has led to an increase in tradable supply. Correspondingly, the spot basis continued to weaken, futures prices fell sharply, and the load of high-cost coal-to-ethylene glycol dropped significantly.
Cause of expansion of ethylene glycol
With favorable policies, domestic ethylene production capacity continues to expand. In order to develop my country’s petrochemical industry and solve problems such as my country’s low level of industrial integration, lagging development of high-end petrochemical products, and structural shortages in supply, the National Development and Reform Commission issued the “Petrochemical Industry Layout Plan” in May 2015. The “Plan” proposes that my country will focus on the construction of seven major petrochemical industry bases: Changxing Island in Dalian, Caofeidian in Hebei, Lianyungang in Jiangsu, Caojing in Shanghai, Ningbo in Zhejiang, Huizhou in Guangdong, and Gulei in Fujian. As a downstream of ethylene, my country has a large supply gap of ethylene glycol from 2009 to 2019. It needs to import a large amount of ethylene glycol from Saudi Arabia and other countries every year. During this period, the import dependence remained at 60%. With supply exceeding demand, the profit per ton of domestic ethylene glycol is as high as 3,315 yuan/ton. Therefore, in response to national calls and considering product profitability, most of the ethylene terminals of large domestic refining and chemical projects are equipped with ethylene glycol devices. Since 2019, large refining and chemical projects have gradually been implemented, including Hengli’s 1.8 million tons and Zhejiang Petrochemical’s 750,000 tons units with a total production capacity of 2.55 million tons. The production capacity growth rate has reached 23%, which is at the high level of the same period from 2016 to 2019.
The shale gas revolution triggered the expansion of global ethylene glycol production capacity. In recent years, with the vigorous development of shale gas development technology in the United States, natural gas production in the United States has continued to rise. As an associated gas of natural gas, the amount of ethane separated is also increasing year by year. Specifically, U.S. natural gas production increased from 1,066 billion cubic feet to 2,539 billion cubic feet from 2010 to 2019. The amount of ethane separated increased from 317,180 thousand barrels to 666,254 thousand barrels. As ethane production increases, ethane prices fall, and the economics of ethane are also reflected. Therefore, a large amount of ethane is used to produce ethylene in the United States, and ethylene production capacity has expanded significantly. Currently, 78% of U.S. ethylene production capacity comes from ethane cracking technology. Ethylene glycol is the downstream of ethylene, and the expansion of ethylene production capacity also drives the expansion of ethylene glycol production capacity. In 2019, global ethylene glycol production capacity expanded by 1.87 million tons, of which the United States accounted for 82%.
Ethylene glycol expansion path
Ethylene glycol expansion path Alcohol has obvious advantages. First, ethylene glycol has a cost advantage. Compared with domestic coal-based ethylene glycol, the cost of ethylene-based ethylene glycol is lower. Especially the cost of imported ethylene-based ethylene glycol, which is mainly based on natural gas and ethane, is at a global low. For example, the cash flow cost of ethylene glycol produced from ethane in the United States is only 2,353 yuan/ton, plus the freight to China is 700 yuan/ton, which translates into a CIF price of 3,053 yuan/ton. In contrast, the cash flow cost of coal-to-ethylene glycol in China is relatively high, reaching 3,491 yuan/ton, which is equivalent to 3,991 yuan at the East China port price. Second, the volume of ethylene glycol is astonishing. From 2019 to 2020, the expanded ethylene glycol production capacity at home and abroad has reached 4.42 million tons, accounting for 32% of the current domestic ethylene glycol production capacity. my country’s coal-to-ethylene glycol production capacity is 4.89 million tons, and the newly added ethylene glycol production capacity is 4.89 million tons. Glycol can almost replace most of the domestic coal-to-ethylene glycol production capacity.
The supply of goods available for circulation in the market has increased. It is precisely because of the advantages of ethylene glycol at home and abroad that low-price dumping has become the main means for new devices to expand market share. This has led to two results. First, polyester factories have reduced their delivery volume to ports and switched to domestic and foreign ethylene glycol factories. Second, the import of ethylene glycol for trade has increased. The above results in an increase in tradable inventory at the port. Specifically, from January to March 2020, my country’s total ethylene glycol imports were 2.8 million tons, an increase of 7.6% year-on-year from January to March 2019. Looking at countries, the United States, where production capacity is expanding, has seen a significant increase.
Results of ethylene glycol expansion
Ethylene Process B Glycol production capacity is expanding, and ethylene glycol fundamental indicators are bearish across the board. In terms of price, from January 1 to June 8, 2020, the main ethylene glycol futures fell from 4591 yuan/ton to 3709 yuan/ton, a decrease of 20%. In terms of inventory, large amounts of imports have led to high port inventories, with inventories rising from 490,000 tons to 1.38 million tons, an increase of 180%. In terms of basis, under the pressure of high inventory and spot pressure, the ethylene glycol basis weakened, with the basis falling from 287 yuan/ton to -120 yuan/ton. In terms of construction starts, the market share of high-cost coal-to-ethylene glycol has been severely compressed, and the load of coal-to-ethylene glycol has dropped from 80% to 31%.
The supply of ethylene glycol reached the negative limit, causing futures prices to rebound
From the above expansion of ethylene glycol production capacity, we see the negative performance of fundamental indicators. Therefore, when the supply pressure of ethylene glycol reaches its limit, the corresponding fundamental indicators will also change. Specifically, when the negative supply limit appears, the supply of ethylene glycol begins to shrink, ethylene glycol stocks no longer increase, and the basis begins to strengthen. A similar situation did occur before, and futures prices rebounded.
1. Performance of fundamental indicators under the negative limit of ethylene glycol supply
According to past experience, when the ethylene glycol supply pressure reaches the limit, the ethylene glycol supply begins to shrink, the ethylene glycol inventory will decrease accordingly, and the ethylene glycol base differential begins.Go strong. In June 2019, the load of coal-based ethylene glycol began to shrink, and polyester factories increased their delivery of ethylene glycol to the port. The port inventory of ethylene glycol began to fall from a high of 1.34 million tons, and the corresponding ethylene glycol basis difference was -140 yuan/ton. It began to bottom out and strengthen, and futures prices also began to rise. This paragraph is just an example of the performance of fundamental indicators under the negative supply limit. Corresponding to the substantial expansion of ethylene production capacity in 2020, it is not enough to shrink the supply of coal-to-ethylene glycol. A price reversal requires the supply contraction of the ethylene process and inventory Decrease and basis strengthen.
Figure 1: MEG port inventory and basis (2018-2020)
Figure 2: Ethylene glycol inventory and weekly average price (2015-2020)
2. Previously ethylene glycol The price rebound is in line with the extreme negative performance
From mid-April to mid-to-late May 2020, on the supply side, the operating rate of ethylene glycol fell from 74% to 55%. The reason is that in addition to unexpected maintenance, some companies have stopped for maintenance due to expansion pressure, and some companies have switched to the production of ethylene oxide because of the low price of ethylene glycol. In terms of inventory, ethylene glycol stocks fluctuated around 1.25 million tons, and fell to 1.18 million tons during the period. In terms of basis, the basis of ethylene glycol rose from -200 yuan/ton to -120 yuan/ton, and the basis continued to strengthen. In terms of price, the price of ethylene glycol rebounded from 3640 yuan/ton to 3734 yuan/ton. The above shows that the early rebound is actually a manifestation of the ethylene process supply reaching the negative limit.
Figure 3: Ethylene process operating rate (2020.01-2020.06)
Figure 4: Price difference between E0 and EG (2019-2020)
Waiting for guidance from key indicators
At present, the ethylene glycol basis is no longer strengthening, and futures prices are oscillating, which indicates that spot profits are temporarily limited, so the rise in futures is highly limited. In addition, the load of ethylene glycol has begun to increase, and port inventories have risen again, which indicates that bad news is brewing. If the basis begins to weaken, it indicates that negative supply conditions are beginning to appear, and futures prices will return to a bottoming pattern.
1. The basis shows that the rebound momentum of ethylene glycol is temporarily difficult to continue
The smooth operation of the basis shows that there is pressure to continue to push up. As a representative of the strength of the spot, a strong spot means a strong basis, and a weak spot means a weak basis. If the basis no longer strengthens, it would indicate that the spot bullishness is unsustainable. As of June 9, the basis difference of ethylene glycol remained around -120 yuan, which was stable compared with the previous period. This shows that there is no further benefit for the spot market, so the rise of futures is highly limited. In fact, we can also see from the price recently that the trend of ethylene glycol has begun to show top characteristics. As of June 9, the main force of ethylene glycol fell back to 3709 yuan/ton.
2. Negative supply conditions are brewing, so pay attention to the basis trend
According to market data, the supply of ethylene glycol has shown signs of rising, and there is still room for recovery in the future. As of June 5, the domestic ethylene glycol load was 65%, down from 55% before. Overseas ethylene glycol load is 91%, down from 87% before. The supply no longer declines and begins to rebound for the following reasons: First, the supply of EG converted to EO has reached its limit. Second, the equipment that was inspected in the early stage began to return. Looking ahead, the ethylene glycol load will continue to rise. In addition, the current port inventory is 1.38 million tons, which is the previous low of 1.18 million tons. The port inventory has begun to increase. With supply returning and inventories increasing, the focus of prices will return to basis. If the ethylene glycol basis begins to weaken, indicating that the negative supply is realized in the spot, then the price of ethylene glycol will fall back in the absence of unexpected bullishness.
Figure 5: Internal supply of ethylene glycol (2018-2020)
Figure 6: External supply of ethylene glycol (2018-2020)
Conclusion
Short positions still need to see signs of basis weakness. At present, the ethylene glycol basis is no longer strengthening, and futures prices are oscillating, which indicates that spot profits are temporarily limited, so the rise in futures prices is highly limited. In addition, the load of ethylene glycol has begun to increase, and port inventories have risen again, which indicates that bad news is brewing. If the basis begins to weaken, it indicates that negative supply conditions are beginning to appear, and futures prices will return to a bottoming pattern. </p
