PTA and ethylene glycol (MEG) are two “brothers” in the polyester industry chain with the same clan and different origins. Their every move affects the sensitive nerves of the industry chain. Since January, the trend of the “two brothers” has deviated significantly, which makes many investors confused.
Industry insiders believe that the significant difference between PTA and MEG market lies in the different industry supply and demand cycles, PTA is still in the tight supply and demand cycle, while MEG has entered the excess cycle, one is strong in price, the other is weak in rebound after a sharp fall, and the corresponding price difference between PTA and MEG continues to strengthen.
The trend of “two brothers of the same clan and different origins” is obviously divided
From the beginning of January to the market trend before the Spring Festival, PTA as a whole is in the rising stage, up 19%, while ethylene glycol rose only about 5%. The corresponding price gap between PTA and MEG has also expanded from 500 yuan/ton to more than 1300 yuan/ton, and the highest price gap between PTA and MEG has expanded to more than 1500 yuan/ton after the festival.
“Since January, the price focus of PTA and MEG has risen synchronously, mainly due to the low price of downstream polyester filament, the low reserve of weaving factories, the synchronous improvement of industrial chain cost and consumer side, driving the price of polyester raw materials to rise under the background of crude oil price stop falling. But in terms of the increase and the sustainability of the rise, MEG is far less than PTA. Pang Chunyan, an analyst at CIC Anxin Futures, said that MEG had a minimum of 5046 yuan/ton in early January and a maximum of 5457 yuan/ton in late January, but it was only a one-day demonstration. At the end of February, MEG climbed to 5330 yuan/ton and continued to decline, reaching a new low of 5007 yuan/ton after listing. PTA is steadily rebounded from 5560 yuan/ton low to 6738 yuan/ton, the rebound range is more than 20%. After the Spring Festival, the lack of new Lido boost began to adjust, but up to now the maximum adjustment is less than 500 yuan/ton.
From the point of view of industrial chain, the relationship between PTA and MEG can be defined as “same origin but different origin”, and the sources of raw materials of PTA and MEG are different.
According to Futures Daily reporter, PTA is only one kind of raw material, MEG can be obtained from petroleum, natural gas and coal. PTA is the downstream product of aromatic hydrocarbons (specifically p-xylene) in naphtha, while MEG is the downstream product of olefins (specifically ethylene) in naphtha. Therefore, PTA and MEG can be considered as different sources from the raw material side. But PTA and MEG are two raw materials for synthesizing polyester. More than 90% of the consumption of PTA and MEG are concentrated in the field of polyester. Therefore, from downstream consumption, they can be regarded as the same.
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It is precisely because they are of the same clan and different origins that their relations are synchronized and deviated from each other. The key is to see where the contradictions between supply and demand are.
Interview with the Mid-term Freight Daily reporter found that in early January market expectations for PTA overall fundamentals were generally better than MEG. In the current polyester industry chain, PTA benefits from the rising prices of crude oil and raw material PX, while MEG is constrained by the persistent weak performance of high inventory pressure at ports. The two markets are in a double-edged situation.
“The most important performance factor of the two varieties is inventory.” Zheng Youfei, a futures analyst in Yide, said that PTA’s inventory was at a relatively low level in recent years, while MEG’s port inventory was at a relatively high level in recent years, while the port liquefied goods inventory was full. From the perspective of basic expectations, PTA capacity growth in 2019 is limited, while MEG is facing enormous capacity delivery at home and abroad in 2019. At present, the overall domestic start-up is at a high level, the increase of peripheral capacity leads to stronger expectations of import expansion, and the port inventory ratio continues to rise. At present, there is no domestic large-scale maintenance plan except for a few scattered sets of foreign equipment reported.
Moreover, from the perspective of supplier pricing power, PTA factories have become oligarchy, and have greater control over supply, demand and price than MEG factories. “It is hard to see the driving force of MEG’s rising trend in the absence of degraded MEG inventory. One of the reasons for supporting MEG’s price at present is that the sharp drop of MEG in the early stage led to MEG’s coal chemical industry approaching cost rapidly, while MTO and ethylene technology began to lose money long ago.” Zheng Youfei said so.
The continued widening of the price gap between the two reflects fundamental differences
Industry insiders believe that the significant difference between PTA and MEG market lies in the different industry supply and demand cycles, PTA is still in the tight supply and demand cycle, while MEG has entered the excess cycle, one is strong in price, the other is weak in rebound after a sharp fall, and the corresponding price difference between PTA and MEG continues to strengthen.
In the survey, Futures Daily reporters found that the price gap between PTA and MEG has expanded rapidly twice since the second half of 2018. The price gap between PTA and MEG has expanded from – 1300 yuan/ton to near Ping Shui in a short period of time, then weaker oscillation, until mid-late December, it began to expand again to the current level of 1300 yuan/ton.
“The performance of the spread is actually based entirely on its own fundamentals.” Yu Yongjun, an analyst at Huatai Futures, said that because PTA and MEG share the same downstream polyester, their price trend has a high correlation, but the price difference between PTA and MEG depends on their basic strength and the characteristics of variety volatility.
In his view, due to the high volatility of MEG and the greater dependence on imports, the fluctuation of the price difference between them basically depends on the fluctuation of MEG price before July-August 2018. However, with the rise of PTA volatility and the deterioration of MEG fundamentals after July-August 2018, the fluctuation of the price difference between the two gradually depends on the fluctuation of PTA prices. “Although the price difference between them fluctuates sharply, it is also very reasonable and coincides with the evolution of supply and demand.” Yu Yongjun said that PTA prices were often higher than MEG prices before 2013, but as PTA supply and demand entered the excess cycle, PTA prices were often lower than MEG prices; into the second half of 2018, the price gap was completely reversed.
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In fact, from the historical trend of PTA and MEG price difference, since the second half of 2013, PTA market has stepped into a serious excess stage due to the large expansion of new PTA production capacity, while MEG has gradually entered a negative stage due to the relatively limited domestic new capacity and relatively tight balance of supply and demand pattern. As of mid-2018, the price difference between PTA and MEG has always been in the range of 0-3000 yuan/ton.
“At this stage, the price trend of MEG has always been relatively stronger than PTA, but since August 2018, domestic and foreign MEG capacity has expanded substantially, MEG has entered a relatively excessive stage of capacity, and PTA experienced a capacity expansion period from 2012 to 2015, the new capacity expansion period will not come until 2020. At the same time, the new capacity expansion of raw material PX will also be realized in the second half of 2019. Therefore, since the fourth quarter of last year, the strong and weak relationship between PTA and MEG has been greatly reversed. PTA price trend has always been relatively stronger than MEG, resulting in a sharp rise in the price gap between them from – 1350 yuan/ton to more than 1500 yuan/ton in the near future. Wang Tingfu, an analyst at Dongwu Futures, told Futures Daily.
As for the performance of the two markets and price differentials, most market participants believe that the current price differentials are close to the limit level. The underlying basic logic is that the supply and demand fundamentals of PTA are relatively tight balance in 2019. PTA is regarded as a long-term allocation in the first year of the market, while the MEG market has gradually increased its supply pressure since the fourth quarter of last year as a result of entering a new round of capacity delivery period. Accumulated to the highest level in previous years, the market is pessimistic about MEG price expectations. In this basic context, multi-PTA empty MEG has also become the preferred position for institutions or hedge arbitrage funds.
“In fact, the strength of the relationship between the two fundamentals has been determined before MEG futures went public. The continuous expansion of the price gap between PTA and MEG reflects the differences between the two fundamentals.” Pang Chunyan said, but this disagreement will not continue. MEG market bearish fully reflects that when the price reaches a low level, if the equipment maintenance and downstream consumption rebound, MEG has a buying value, its price will also have a strong elasticity. “Price volatility is mainly due to the participation of a large number of traders in the market, and the price gap between the two is expected to be repaired in stages.”
In Yu Yongjun’s opinion, PTA’s supply and demand ratio will be tighter and tighter this year. Compared with most other commodities, PTA will probably perform stronger and make better overall profits. While MEG is still in the first half of the surplus cycle, it is expected that the performance of the whole year in the overall commodities will be weaker, and the corresponding production profits will be difficult to have a better performance. “Nevertheless, it is expected that there will be an opportunity for a periodic rebound to repair. The overall demand will be relatively high from March to August, while the supply is expected to shrink at this stage after continued weak profits. There will be an obvious inventory degrading as a whole, and prices and profits will rise correspondingly.”
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The key point of dominating the two markets is to meet supply expectations
Interview with the reporter of the Mid-term Freight Daily learned that the expansion of PTA-MEG price gap before was caused by the price differentiation between the two. But as PTA prices continue to rebound, its supply and demand fundamentals accumulate a larger margin, and the cost-side push is also marginal weakening, PTA prices will continue to rise substantially limited space, for this, PTA and MEG ice-fire status of the continuity of the two days has also been questioned by the market.
“Despite the pressure of MEG port accumulating warehouses, with the spot price of MEG coming below 5000 yuan/ton, the ex-factory price of inland coal-based MEG enterprises mostly falls below the marginal cost line. Mainstream MEG devices in eastern China also have the operation of load reduction. There will be marginal tightening expectations in the later period of MEG supply. The demand for polyester and terminal weaving will start gradually at the end of this month, and the supply and demand fundamentals of MEG will be marginal. Inter-temporal improvement, falling to the cost line near the MEG price has been facing the point of no decline. Wang Tingfu said that PTA and MEG will not last for a long time.
However, in the view of Zhang Xiaozhen, an analyst of Guangfa Futures, the status of PTA and Ethylene Glycol “ice and fire” is likely to continue in the current situation. “PTA is still better than MEG in terms of supply. From the current inventory level, PTA social inventory is above the level of 1 million tons, compared with previous years, it is still at a low level; MEG port inventory has reached 1.19 million tons, at a historical high, the pressure of excess supply of MEG on MEG price suppression is more obvious. Zhang Xiaozhen said.
Respondents generally believe that whether the price gap between PTA and ethylene glycol will continue to expand in the later period depends on the timing of new domestic PX production capacity, the progress of new MEG production capacity and the situation of new PTA production capacity at the end of the year.
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“In terms of the new production capacity of domestic PX, according to the current understanding, there may be a test run plan for the second quarter of Hengli PX plant, which may have little impact on the market supply and demand at the initial stage, but the supply and demand of PX will gradually relax in the second half of the year, and the corresponding price of PX will weaken. Then the focus of PTA will also move down with the cost, and the price difference between PTA and ethylene glycol will converge to a certain extent.” Zhang Xiaozhen said.
In addition, the delivery of new capacity of MEG and PTA is uncertain in terms of time and extent, and the price difference between PTA and ethylene glycol will be affected by their respective capacity delivery. In the long run (after 2020), because PTA and raw material PX have a large number of new production capacity, PTA will face the situation of excess supply and cost decline at the same time, PTA and MEG prices will probably shrink substantially.
“For PTA, the key points of later stage concern are mainly the progress of PX delivery and the size of PTA phased maintenance. On the whole, it is difficult for PX supply and demand to get rid of the tight situation before the full release of PX supply. The corresponding cost-side performance is expected to be stronger. Restricted by the tight PX, PTA profits are easily eroded by raw materials, PTA supply also shrinks, which ultimately affects the balance between supply and demand of PTA. Yu Yongjun said that the main source of MEG is the excess pressure brought by the mismatch between global supply growth and demand growth.
In his view, this year’s demand side has been difficult to reach the high level of the past two years, while the late last year more new MEG devices were put in place, and the time for full release of supply is mainly from this year. At present, MEG inventory has reached the highest level for many years. In the later stage, the supply contraction is needed to improve the balance between supply and demand. More attention should be paid to the domestic and foreign equipment maintenance.
In view of the potential market transformation of PTA and MEG industry chain in the later period, Zhang Xiaozhen believes that the strategy of buying PTA and throwing MEG may still be effective in the short term, but in the medium term (before and after the launch of Hengli Refinery PX) should be adjusted in time.
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