Facing the predicament of overcapacity
It is understood that more than 90% of ethylene glycol is used to produce polyester products in China, and the fluctuation of ethylene glycol price affects the production and operation of downstream polyester enterprises. In mid-June, the reporter of Futures Daily visited several polyester factories and mainstream traders in Zhejiang Province with a delegation from Daijin Commercial Research Institute. He had a detailed understanding of the current production, sales and inventory situation in the upstream and downstream of the industrial chain, as well as the production and operation mentality of enterprises and their views on the future market trend.
A New Capacity Centralized Delivery Industry May Face Reshuffling
At present, the ethylene glycol industry is facing the predicament of overcapacity. Affected by the expansion of production capacity of various production processes of ethylene glycol in recent years, especially the rapid development of coal-based ethylene glycol in China in recent years, while the downstream demand is difficult to improve, coupled with high port inventory, since mid-March this year, the price of ethylene glycol futures has ended rebounding and turned into a unilateral downward trend. The 1909 contract is from 5483 yuan/ton in a year. After the high dropped to the lowest level of 4314 yuan/ton, the low-level narrow-amplitude oscillation pattern appeared recently, which fluctuated around 4400 yuan/ton.
Futures Daily reporter learned from the survey enterprises that, at present, both ethylene-based ethylene glycol enterprises and syngas-based ethylene glycol enterprises are facing the pressure of overcapacity and oversupply in the whole industry. Nevertheless, the production enterprises still maintain high-load operation, exchange market for profit, and cope with the capacity growth of blowout at home and the competition of import sources abroad.
In response, Rongsheng Petrochemical Co., Ltd. (hereinafter referred to as Rongsheng Petrochemical) said that the main consideration of glycol production enterprises is comprehensive profits, rather than single production line profits of glycol. If the production of ethylene glycol is suspended, the sale of ethylene stock will be very difficult, because ethylene liquidity is poor, there are only 20 ethylene vessels in Asia, so it is not cost-effective to sell ethylene alone. In addition, 80% of the profits in the ethylene chain come from polyethylene and 20% from ethylene glycol, unless there is no profit in the downstream of ethylene, shutdown may be considered. He believes that although the current profit of coal-making method is not good, in order to maintain cash flow and customer relationship, enterprises can optimize production, but it is unlikely to stop production.
Industry insiders have analyzed that the current excess supply of ethylene glycol is just beginning, the real challenge has not yet come. Over the next five years, global ethylene glycol production capacity will witness substantial growth. Abroad, there are many large-scale projects in the Middle East and South Asia. Most of these devices use inexpensive ethane as raw material, which has strong international competitiveness. Domestically, in 2019, 6-7 million tons of annual capacity were planned to be put into operation, and in 2020-2025, 15 million tons of annual capacity were planned to be put into operation.
Relevant statistics show that by the end of 2018, China’s total ethylene glycol production capacity of all routes reached 10.54 million tons. By 2022, if all kinds of domestic planned ethylene glycol routes can be put into operation according to actual planning, the production capacity of ethylene glycol will reach 30.58 million tons, while the apparent demand of China’s ethylene glycol will reach 16.68 million tons in 2018, and it is expected to reach 20.24 million tons in 2022.
“With the development of shale oil, the production of overseas natural gas will increase, and this method has obvious cost advantages. In the future, the competition pattern of the ethylene glycol market will be coal chemical industry, large refinery and overseas gas head. The ethylene glycol industry may face reshuffling.” Rongsheng Petrochemical related person in charge said.
“With the global surplus of ethylene glycol production capacity, when we purchase raw materials now, the price range negotiated with foreign suppliers is relatively large.” Rongsheng Petrochemical related person in charge told reporters that at present the bargaining power of upstream petrochemical enterprises is weakening, while the bargaining power of downstream enterprises is gradually increasing.
B Port’s High Inventory Polyester Enterprises Lack of Stock Power
Relevant statistics show that on June 27, the inventory of ethylene glycol ports in East China’s main port region was about 1.251 million tons, down 57,000 tons annually from the previous period. Among them, Zhangjiagang stock is 810,000 tons, which is 49,000 tons less than the previous period; Shanghai and Changshu stock is 169,000 tons, which is 26,000 tons more than the previous period; Jiangyin and Changzhou stock is 103,000 tons, which is 80,000 tons more than the previous period; Taihu stock is 93,000 tons, which is 18,000 tons less than the previous period. Although stocks have declined slightly recently, 1.25 million tons are still at their peak in the past five years.
In the investigation, Zhu Chao, director of polyester Department of Ningbo Shanneng Chemical Company, also confirmed this point. “At the beginning of June, the stock of ethylene glycol ports reached the highest level of 1.43 million tons in recent years, and there was almost no tank capacity at that time. Since June, with the delayed resumption of coal production, the contract of about 60,000 tons in South Asia of Taiwan has been decreasing, and the start-up load of polyester has increased. The phenomenon of depot has appeared in the port. At present, the stock has dropped to 1.25 million tons, but it is still at a historic high level. He told Futures Daily that in early July, with the increase of coal start-up load in mainland China and the resumption of production in South Asia, Taiwan’s stocks will still return to a slow state of accumulation, and port stocks are expected to rise to 1.3 million tons on Thursday.
High inventory affects the market price of ethylene glycol, and the warehousing strategy of downstream enterprises has been adjusted accordingly. “For such a high inventory and high production variety as ethylene glycol, the downstream polyester factory lacks the power of reserve, on the one hand, because there is no shortage of goods in the market, it is easier for the factory to replenish the warehouse; on the other hand, the factory is not optimistic about the future price of ethylene glycol, and will worry about the problem of stock preservation.” Huang Weilin, a researcher at Shanghai Pinellia Investment Management Center, explained.
Reporters learned in the survey that the stock of ethylene glycol in large polyester factories such as Rongsheng Petrochemical Company and Hengyi Petrochemical Company is generally about 20 days, while the stock of ethylene glycol in small and medium-sized enterprises such as Zhejiang Tiansheng Chemical Fiber Company (hereinafter referred to as Tiansheng Chemical Fiber Company) and Zhejiang Jiabao Polyester Company (hereinafter referred to as Jiabao Polyester) is generally maintained for 3-4 days.
Zhu Chao said that the cost of ethylene glycol spot warehousing is 1.5 yuan/ton per day, 45 yuan/ton per month, interest on capital is 20 yuan/ton per month, and 400 yuan/ton for half a year. If there is no obvious inventory removal, the cost of holding ethylene glycol is too high in the case of high inventory, so factories and traders are willing to hoard. Not strong.
In addition, the recent decline in profits of polyester enterprises is also an important reason for their lack of enthusiasm for inventory. At present, the inventory of finished products in polyester factories is not high, and the inventory of polyester has been transferred to the weaving market. In terms of enterprise profits, the person in charge of Rongsheng Petrochemical Company said that the production profits of polyester enterprises were better from January to March this year, but after April, although the price of ethylene glycol continued to fall, the profits of polyester enterprises were greatly reduced or even lost due to the soaring price of PTA raw materials and the slowing down of downstream demand for polyester.
C supply side has not yet improved most enterprises look down on the late market
In the survey, reporters learned that enterprises generally believe that the overall supply of ethylene glycol is in the stage of excess, and this situation is continuous, has not improved. In the future, with new production capacity of ethylene glycol and continuous negative feedback downstream, combined with the traditional off-season pressure in June-July, the pressure in the third and fourth quarters of this year may be greater than last year.
Tiansheng Chemical Fiber responsible person described to Futures Daily reporter that, due to the serious expansion of downstream warp knitting capacity in the early stage, this year’s textile market is weak, and the recent two high-yield sales are due to the upstream raw material price increases to drive the downstream enthusiasm for goods, the rest of the time to just need to purchase. For the weaving market, the biggest problem is the high stock of grey fabrics, which is not unacceptable for enterprises. The profits of weaving enterprises can still be maintained, and large-scale parking is not expected in the short term. Therefore, large-scale inventory of weaving products in the future should be expected to strengthen the terminal orders.
Similarly, Jiabao polyester related leaders are not very optimistic about downstream consumption. “July is about to enter the off-season of sales, gray cloth inventory is difficult to reduce, but the terminal can withstand.” The person in charge said that the downstream weaving enterprise capacity continues to expand, in the past according to anticipated needs ahead of time production, now the capacity is large, can meet the order demand at any time, so orders will not be issued in advance, but will be placed only if there is demand. In addition, at present, some export orders are decreasing, while the pre-prepared export products are difficult to be re-exported to domestic market, products are accumulating continuously, and stocks are rising.
In Zhu Chao’s view, it is difficult for short-term spot prices of ethylene glycol to rebound substantially. Although the absolute price of polyester factory products is relatively low, polyester factory is willing to take the initiative to inventory when prices rebound, indicating pessimistic downstream.
However, according to the relevant person in charge of Hengyi Petrochemical, there are opportunities in the domestic and export aspects of polyester products in the future.
Domestic demand is affected by two factors: first, home textiles, from the previous real estate start-up data, more completed in the future, the demand of home textiles driven by real estate will be better than that of clothing; second, the overall material consumption of autumn and winter clothing in the second half of the year is greater than that in the first half, and the demand for polyester will be better than that in the second half of the year.
D. Futures Price Discovery Function
New production capacity has been centralized, while downstream demand has not improved, coupled with high port inventory, and the price of ethylene glycol has been declining all the way, the industry is facing a reshuffle. On December 10, 2018, the timely listing of ethylene glycol futures provided the industry with new hedging tools. In this context, it is particularly important for industrial chain enterprises to use futures tools to manage risks in their operations.
According to Futures Daily reporter, since the listing of ethylene glycol futures, the trading scale has increased steadily, the market structure has become more and more reasonable, and it has emerged in the chemical industry market. In the first half of this year, the average daily trading volume and the average holding volume of ethylene glycol futures were 217,200 and 242,200 hands respectively, accounting for 25% and 21% of the chemical industry sector in the same period. The total number of corporate customers involved in trading was nearly 3,000, and the average holding volume of corporate customers was 49%. In June, the first delivery of ethylene glycol futures was successfully completed. The customers involved in the delivery covered the whole production, trade and consumption chain of upstream, middle and downstream, and the industry customers actively participated. By the end of June, the delivery volume of ethylene glycol futures has reached 150,000 tons. The various systems have been tested by the market and achieved a smooth start, and have gradually matured.
From the perspective of futures price trend, since the listing of ethylene glycol futures, prices have declined in bands, which objectively reflects the fact that the supply of ethylene glycol market is seriously excessive. Ethylene glycol futures 1906 contract basis difference average value is – 49 yuan / ton, less than 1% of the contract average price. The settlement price of the main contract of ethylene glycol futures dropped from 5084 yuan/ton at the beginning of the year to 4445 yuan/ton at the end of June, a decrease of 13%. Wind data show that domestic spot prices fell by 15% in the same period, and spot prices are highly correlated. All these show that the futures market reflects the changes of the spot market well and the futures price discovery function is beginning to show.
According to relevant persons, since the listing of ethylene glycol futures, the enthusiasm of industrial customers to participate in futures trading has increased. Ethylene glycol production enterprises are actively trying to use futures tools, and China Sea Shell has also applied for the establishment of Ethylene Glycol Delivery Factory Warehouse, and downstream customers are the main participants in the Ethylene glycol futures market. Dai Yumin, general manager of olefin business of Yuanda Energy Chemical Co., Ltd. (hereinafter referred to as Yuanda Energy), told reporters that in the futures market, industrial customers can achieve good inventory management and price management through futures tools.
“In the process of falling prices, upstream enterprises in the industrial chain can lock in profits through hedging, especially in the situation of excessive supply, through the forward water-raising structure can achieve production hedging well; middle-stream traders can flexibly practice base trade, and can make selling and buying hedging for inventory or contracts; Downstream polyester enterprises can optimize the raw material cost by using the far-month contract discount water, and lock in the raw material cost of the order. Dai Yumin believes that since the listing of ethylene glycol futures, prices have shown a downward trend in the band, which fully reflects the market structure of serious excess market supply, and provides a more efficient, safer and larger-scale market channel for the industry. Industrial customers actively participate in the ethylene glycol futures trading, which provides more liquidity for the market, promotes the upgrading of the polyester industry, improves the risk prevention ability of upstream, middle and downstream enterprises, and makes the combination of entities and finance closer.
According to the reporter’s understanding, as one of the main traders in the ethylene glycol market, Yuanda Energy needs a large stock of ethylene glycol to supply the terminal polyester enterprises steadily. However, in the environment of serious oversupply and falling prices in the near future, the stock of standing energy will cause large losses for enterprises. Thanks to the listing of ethylene glycol futures, the company sold hedging on the contract of ethylene glycol futures 1906, which protected the inventory value, reduced or even avoided losses, and enhanced the confidence and ability of service entity industry. During this period, the company also tried to participate in the sale and delivery of Ethylene Glycol Futures 1906 contract.
Yu Yongjun, senior researcher of Ethylene Glycol Futures in Huatai, also said that at present, the middle and lower reaches of enterprises participate in futures more, mainly because they have rich experience in futures participation before Ethylene Glycol Futures listing. Based on the overall futures tool application environment of the industry, the future prospects for industrial enterprises to participate in ethylene glycol futures are very optimistic, and ethylene glycol has the potential to become a star variety of chemical industry.
With the increasing participation and familiarity of enterprises with Ethylene Glycol, the influence of futures prices has become increasingly prominent. Xu Li, CITIC Futures Research Department, told reporters: “The domestic market is still highly dependent on Imported Ethylene glycol. At present, imports are usually purchased by signing long-term contracts with large foreign suppliers. Downstream polyester enterprises are relatively passive in pricing ethylene glycol.”
According to Xu Li, the listing of ethylene glycol futures provides a new pricing option for polyester enterprises. At the same time, it can play a hedging role by means of hedging, and the market information tends to be more abundant and transparent. Industrial customers can judge the trend of ethylene glycol more accurately through futures, which is convenient for inventory management and profit management. For example, companies can protect the price by selling futures when they look at the weak market of ethylene glycol, and they do not need to spend a lot of money to hoard spot when prices are low in the later period, so long as they do more futures, they can achieve profit lock-in. In a word, after walking with two legs of futures and spot, the pace of Ethylene Glycol enterprises is more steady.