In the second quarter, the polyester market may be in a state of “high in the front and low in the back”. In terms of variety selection and rhythm, ethylene glycol is more optimistic in the short term. We believe that ethylene glycol will benefit from the continuous de stocking.
(1) Shut down of foreign plants and import reduction of ethylene glycol
Ethylene glycol is still in the trend of destocking. We believe that with the slow recovery of import volume and the upward focus of domestic production, the inflection point between supply and demand of ethylene glycol will appear in the middle and late April at the earliest, and may really usher in obvious inventory accumulation. (1) The import of ethylene glycol is still an important part of domestic supply. In 2020, the total import volume of ethylene glycol is nearly 10.55 million tons, accounting for 54% of the total domestic supply. In terms of the quarterly distribution of import volume, the import volume showed an expanding state from the first quarter to the third quarter. It didn’t shrink significantly until the fourth quarter. From the change of import volume in the fourth quarter, the month on month decrease is close to 26%, and the import volume in the current quarter only accounts for 18% of the total import volume of the whole year, which is nearly 6% lower than that in the same period of previous years.
It is estimated that the total import volume of ethylene glycol in the first quarter will be around 2 million tons; from the comparison of import volume, it will be nearly 600000 tons lower than the average level of the same period from 2018 to 2020; from the marginal change point of view, the growth rate of this import volume will be about 5 percentage points lower than the level of the same period from 2018 to 2020.
(2) Import reduction drives domestic inventory to accelerate de stocking
From the perspective of ethylene glycol inventory changes, the fourth quarter of last year reflected the accelerated decline of total inventory, including the dominant port inventory and invisible factory inventory. In the first quarter of this year, the dominant port inventory of ethylene glycol was further down, but the change of total inventory was relatively mild, which implied the rising state of invisible factory end inventory in this period. By stages, under the influence of import reduction in the fourth quarter, the total ethylene glycol inventory decreased by more than 700000 tons, of which the dominant port inventory decreased by more than 50 tons, and its proportion in the total ethylene glycol inventory decreased from 50% at the end of the third quarter to around 41%, and this proportion basically returned to the level at the end of 2019. In the first quarter of this year, the dominant port inventory of ethylene glycol was further declining. As of March 22, the main port inventory of East China had dropped to 635000 tons, more than 200000 tons lower than that at the end of last year. However, the total amount of ethylene glycol inventory in the same period had dropped by nearly 90000 tons to around 2 million tons, basically around 2.05 million tons, showing a relatively stable state. In fact, it also reflected the decline of dominant inventory of ethylene glycol The invisible inventory in the process of decreasing is in the state of increasing.
(3) The recovery of foreign plants coincides with the domestic production capacity
Judging from the changes of foreign devices, the capacity of the interruption reached a high point in February and fell back in March, but it was still higher than the level in January. From the perspective of plant distribution, the capacity interruption in North America accounted for about half of the total capacity in February and March, and the United States was the largest incremental source. From the actual situation, the cold wave was the direct cause of the previous ethylene glycol capacity interruption in the United States, but it has been restarted since March, and has been basically restored in the near future. As for the impact of domestic imports, we believe that the month on month increase of import volume in April is still the approximate time, but the substantial increase of North America’s supply may not occur until the end of April or even may.
The domestic ethylene glycol production level has been rising. At the same time, benefiting from the expected input of planned production capacity, the expectation of upward production is also further strengthened.
First of all, the rebound of ethylene glycol price and the expansion of production profit strongly promoted the enthusiasm of ethylene glycol production. In fact, with the rebound of ethylene glycol price, the profit level of either oil based ethylene glycol production or coal based ethylene glycol production has risen sharply. According to the data accounting, during this period, the maximum profit of oil based ethylene glycol per ton expanded to around us $200, while the maximum profit of coal based ethylene glycol per ton increased to around RMB 1500 per ton, all reaching a new high since 2019.
The elasticity of ethylene glycol production to price and profit is relatively large. With the expansion of profit, domestic ethylene glycol production has increased significantly. From the sub item point of view, the increase rate of oil to ethylene glycol production during the period was significantly higher than that of coal to ethylene glycol. The average operating rates of coal to ethylene glycol and oil to ethylene glycol increased by 8.2% and 13.8% respectively in March compared with January.
With the increase of glycol operation rate, the output level will rise to around 1 million tons in March. The total output of glycol in the first quarter is expected to be around 2.7 million tons. The monthly output and the total output in the first quarter will increase by 12.8% and 13.1% respectively.
Secondly, the expected input of planned production capacity will further strengthen the upward expectation of domestic production.
In terms of the short-term planned production capacity, the recent production of Shaanxi Weihua tends to be stable after the test run in mid March, and the extended oil plant will restart in late March; satellite petrochemical and Zhejiang Petrochemical may achieve stable production in April; in addition, the test run of Jianyuan coal coke and Hubei sanning, which were postponed in the fourth quarter of last year, also exists in April to May. If the planned production capacity can be put into operation smoothly, the domestic ethylene glycol production capacity will increase again.
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Domestic production will benefit from the investment of production capacity. Based on the schedule estimation of production capacity, it is estimated that the output increment brought by the new production capacity from April to June will be 130000 tons, 280000 tons and 300000 tons respectively; affected by the production capacity, the ethylene glycol output is expected to exceed 1.1 million tons in May, or further rise to around 1.2 million tons in June. Under the market expectation of increasing the production focus, the inflection point between supply and demand of ethylene glycol market will appear in the middle and late April at the earliest, and there will be a significant inventory accumulation in May.
(4) Conclusion and suggestion
The general view of terminal textile and clothing demand is “high growth under low base”. If the influence of base is excluded, the compound growth rate of domestic textile and clothing retail sales from January to February is basically around 0, but the compound growth rate of textile and clothing exports is still more than 10%. For the demand of terminal textile and clothing in the second quarter, we think the growth rate will have a significant downward trend. We expect that in the first half of this year, the year-on-year growth rate of the total retail sales of domestic textiles and clothing will drop to 27-30%; the export of textiles and clothing will show a high momentum, and the re inventory process of foreign markets may continue to support the export of domestic textiles and clothing.
Polyester production continued to rise due to the expansion of production base and the increase of operating rate, which also provided a higher consumption base for ethylene glycol. The export of polyester products has recovered, but at present, the growth rate of export is relatively moderate, which means that under the environment of increasing polyester production, the digestion pressure of domestic market continues to increase. Polyester’s recent performance shows that the operating rate is continuously on the rise, but the production and sales remain at a low level. In this case, polyester inventory is being replenished, and the replenishment speed of inventory is also relatively fast. We expect that the quantile of polyester inventory will return to around 90% by mid April. We think that the improvement of production and sales or the regulation of supply is very important due to the pressure of inventory Necessary.
Ethylene glycol is still in the process of storage. In the fourth quarter of last year, both the dominant port inventory and the invisible factory inventory decreased significantly; since this year, the dominant port inventory has continued to decline, but the invisible factory inventory has actually increased.
In terms of glycol supply, the increase of import is relatively slow, but the direction of improvement is relatively clear; domestic production has benefited from price rebound and production profit recovery, at the same time, the investment of new capacity will further increase the process of domestic production improvement. In general, we believe that with the slow recovery of import volume and the upward growth of domestic production center, the inflection point between supply and demand of ethylene glycol will appear in the middle and late April at the earliest, and the obvious inventory accumulation may come in May.
Trading strategy: ethylene glycol presents high volatility, which may be more suitable for options to do price risk management; trading rhythm, in the first half of the second quarter, we are more optimistic about ethylene glycol, mainly due to the trend of ethylene glycol depopulation. The expansion of ethylene glycol supply is expected to bring about the continuous contraction of production profits. It is suggested to pay attention to ethylene glycol and crude oil, naphtha, etc., or Hedging opportunities between ethylene glycol and steam coal.
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