Macro-led glycol market -Ethylene Glycol Focus Analysis

Macro-led glycol market -Ethylene Glycol Focus Analysis

[Introduction] Since the start of a new cycle of ethylene glycol expansion in 2020, China's ethylene glycol supply capacity has continued to rise rapidly, and after entering the fourth quarter of 2022, new production capacity in the expansion cycle began to be released centrally again, and the increment on the supply side has formed an obvious disturbance to the advancement of the supply and demand structure of ethylene glycol. However, at the same time, the weight of macro-level factors on prices began to rise, and the impact of changes in the supply and demand structure of glycols on prices instead receded to a secondary position.

A very clear feature that can be observed going into the fourth quarter of 2022 is that the main factors of price volatility in the glycol market shifted further from fundamentals to macro. During the National Day holiday, international crude oil prices continued to rise during the National Day holiday due to the OPEC+ decision to cut production by 2 million pass/day, exceeding expectations of the scale of production cuts, with WTI rising to USD 92.64/barrel on 7 October, up 20.77% from USD 76.71/barrel on 26 September.

The substantial rise of crude oil corresponded to the strengthening of glycol cost support, however, when the National Day holiday returned, it can be seen that the spot market price of glycol on October 8 became the highest point of the spot price in the fourth quarter of 2022, and then in the month after the National Day, the spot price of glycol continued to go down, and on November 1, the spot of glycol closed at 3772.5 yuan/ton, compared with 4437.5 yuan/ton on October 8 On 1 November, the spot price of ethylene glycol closed at RMB 3772.5/mt, down 14.99% from RMB 4437.5/mt on 8 October.

The cost support brought by the strengthening of crude oil has not been effectively realized, while at the same time, in addition to the strengthening of glycol costs, the supply and demand structure of ethylene glycol in October 2022 still maintains the depot state. After a total of 500,000 tons of depot in the third quarter of 2022, the supply and demand structure of ethylene glycol in October still maintained a small depot state, East China port inventory remained at a relatively low level near 800,000 tons, but the continued depot also failed to form a better boost to the price of ethylene glycol.

The main reason why the cost of ethylene glycol and the supply and demand structure of the price in October were not effectively realized is that, after entering October, macro market expectations have changed significantly, on the one hand, the impact of the Fed's continuous interest rate hike has gradually taken effect, and the strength of the US dollar has formed a more obvious suppression of the commodity market priced in US dollars. On the other hand, the global economy was sluggish and end-consumption data turned weaker, such as China's total retail sales of consumer goods, which fell from 5.4% year-on-year growth in August to 2.5% year-on-year growth in September.

Not only did the year-on-year growth rate of total social consumption fall, it can be seen that the year-on-year growth of total retail sales related to apparel was already negative in September, and the negative growth in October and November was widening as we entered the fourth quarter. The downturn in end demand led to a rapid downward revision in market expectations for demand, so although glycol was still in the de-stocking phase in October, the downward revision in demand expectations in the far months led to a downward revision in market participants' assessment of commodity valuations, including glycol, so we can observe a resonant downward trend in the commodity market in October.

However, at the end of October, the commodity market showed an obvious stopping and rebounding trend, after which varieties such as iron ore and soda ash even showed a cumulative increase of over 40%, and ethylene glycol also showed an obvious stopping and rebounding trend after entering November.

At this time we observe the fundamentals of ethylene glycol including the supply and demand structure as well as the performance of the cost side, in fact, we can see that the crude oil price turned weak in November-December, into December WTI even went down to close to the integer mark of $70/barrel, the performance of the cost side of ethylene glycol is not ideal. And the supply and demand structure of ethylene glycol in November and December also appeared obvious changes, due to Shaanxi coal Yulin 1.8 million tons, Shenghong refining 1 million tons and other new devices put into production, ethylene glycol supply to maintain a rapid rise in the state, and the demand side by the weak end consumption and the end of the second half of the consumption peak period factors such as poor performance, polyester link start continued to decline, ethylene glycol supply and demand structure from the previous to go to the warehouse fast The supply and demand structure of ethylene glycol from the previous period to the rapid accumulation.

However, as in October, the impact of glycol fundamentals on prices failed to materialize, the dominant logic of the commodity market in November and December still lies in the transformation of the macro market. After entering November, along with the market for regulatory policy updates are expected to gradually warm up, and thus strengthen the market for the far month demand is expected to optimism. Subsequently, the "twenty", "new ten" landed one after another, expected to be confirmed after the market sentiment further heated up, driving the overall strength of the chemical sector, during the glycol prices followed the rebound mainly, glycol fundamentals of the weak state did not form substantial pressure.