US cargoes are getting discharged at Chinese ports with heavy MEG volume. The trade pattern has the potential to support freight rates on long-haul routes and increase spot activity in 2H20.
It is no news that the US-China tariff war has ruined trade relations between the two countries. But even after a 25% import tariff, rising US MEG cargoes are being unloaded at Chinese ports on account of high MEG production in the US. About 336,100 tonnes of US MEG was discharged at Chinese ports from January to June 2020. This trade pattern is positive news for chemical shipping as freight rates on long-haul chemical routes will be strengthened in the remainder of 2020.
MEG is used as a feedstock to create polymer polyesters and polyethylene terephthalate (PET) with many end applications such as packaging materials, plastic goods among others. China is the largest MEG importer with 4.5 million tonnes imported in 2019. The country imports MEG for eastern domestic regions as many coal-based MEG plants are located in the western or northern region and high transportation cost acts as a barrier for the eastern region.
Ample availability of US MEG in China has led to stockpiling on the eastern coast. Inventories at Taicang and Ningbo ports are mainly for the consumption of local plants and Zhangjiagang’s inventory is for trading MEG for domestic distribution. Zhangjiagang port is causing delays in discharge as the tank storage is nearly full. However, MEG demand is low in China as well as in other Asian countries due to the weak polyester export demand. Due to the high inventories and high naphtha prices, the naphtha-based MEG plants located in the eastern part of China are either cutting operations or making ethylene oxides as the price of ethylene oxide is on the rise.
The reason for robust MEG supply from the US is price – as the price of US MEG has tumbled by 69% from $550 per tonne in January 2020 to $380 per tonne in June. Low prices from the US reflect its feedstock advantage as US plants use ethane as feedstock while many Asian plants are naphtha based. In addition, the spike in naphtha prices has narrowed the profit margin of Asian MEG producers. Meanwhile, US plants are running at high rates, as the availability of ethane is firm after the shale gas boom in the country.
We expect MEG supply from the US to China to continue in 2H20 as naphtha-based MEG producers are compelled to cut operational rates due to high feedstock prices amid ample availability of MEG. However, the volume will moderate as consumers are also cutting operational rates due to weakening downstream demand. Winter demand is yet to increase as the market is still struggling with COVID-19. Nevertheless, we expect this trade to support freight rates for chemical tankers on long-haul routes in the short-term. Moreover, this will also strengthen spot trading activity due to ample availability and softening MEG prices.