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Insight | Time: Dec 20 2018 10:42AM
MEG market in backwardation,weakness to persists in long term
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MEG market remained fluctuating recently with price level at 5,600-5,800yuan/mt. The market flipped into backwardation struction with prompt/forward spread widening to 40-50yuan/mt. MEG price has dropped by around 30% since the end of the third quarter. The decline was mainly due to the weakness in fundamentals. While during the downtrend, buying activities also emerged at low level.

In addition, at the beginning of December, due to the easing of Sino-US trade friction, polyester sales improved in the short term, and polyester product inventories decreased as operating rate of downstream looms increased. Operating rate of polyester palnts maintained around 88%. Polyester plant recently announced output cut plans, but the impact on average operating rate in December may be limited as most plants will cut output in the month end.

As for MEG, port inventory decreased in the first half of Ded due to waterway closure and slow discharge in port areas. Spot market was firm on tight availability as some traders covered shorts. Coupled with slow customs declaration this month, Dec import and inventory build up would be lower than previous expected.

In the short-term, spot prices were firm due to shortage of contract supply and short coverings. While outlook for Jan market was weak in anticipation of polyester output cut. Traders mainly bought nearby and sold forward materials.

In medium to long term, MEG market is expected to weaken as MEG inventory buildup will sustain in the first quarter of 2019. MEG producers have not cut output despite low prices, while operating rate of polyester gradually decreased. The downside of economic data still weighed on market sentiment. For example, China's official manufacturing PMI fell to 50 in November, the lowest since July 2016. Among them, PMI of medium-sized enterprises and small enterprises fell to 49.1 and 49.2, respectively, which were both below watershed line of 50.

In addition, crude oil and naphtha prices declined from the beginning of December. Naphtha-based MEG cash flow inched up. Imported sources will continued going into Chinese market.
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