CHEMICALS OUTLOOK: Global ethylene and MEG set to struggle in H2 2023 amid oversupply, weak demand

Global ethylene markets are expected to finish 2023 on a low amid continued sluggish downstream derivative demand that failed to rebound seasonally during Q2 2023, market sources said.

Key downstream packaging markets remain hampered by stuttering demand and fluctuating oil prices that squeeze margins in naphtha-dependent Europe and Asia while the US and Middle East embrace cheaper ethane feedstock price advantages.

Global markets continue to eye China for signs of a rebound in domestic demand, which could reduce Chinese exports and enable an uptick in downstream demand that could support ethylene, sources said.

However, that rebound has yet to emerge, and ethylene capacity additions slated to come online would be seeking thin pockets of demand, sources said.

"I feel that the market would be heavily reliant on the Chinese economy, but so far the recovery is much slower than what we expected," a Northeast Asia trader said. "It seems like there are not many bullish factors even in the second half of this year."

In addition, the 45 million tons of ethylene capacity that will have been added over the 2020-2024 period – 25 million tons in China alone - were still expected to exceed demand by more than 9%, according to Paul Joo, of Chemicals Insight APAC data, a division of S&P Global Commodity Insights.

War fallout continues in Europe

As new production in Asia comes onstream, Europe remains particularly challenged by volatile upstream energy and utility costs.

Despite the fall in headline inflation, the Russia-Ukraine conflict was expected to remain a drag on the global macroeconomy. Europe's ethylene market was also seen remaining under pressure from weak demand and oversupply in the second half of 2023 as buying appetite failed to inch up as had been anticipated through the first half of 2023.

And downstream, European monoethylene glycol prices remained historically low and in most cases, below cash-cost levels. Downstream polyethylene terephthalate demand also was historically weak, as consumers look to economize amid rising food inflation and interest rates.

"I'm not optimistic," a European trader said. "The low volumes, the naphtha price and these imports flowing in, and producers [are still] in expensive mode."

US adding ethylene export capacity

European suppliers also expect more pressure from inflows of cheaper ethane-fed US ethylene and derivatives.

Reduced derivative rates in the US has made more ethylene available for export, and Enterprise Products Partners' 1 million mt/year ethylene export terminal on the Texas Gulf Coast operated at 120% to 125% of capacity through much of 2022.

The company is expanding the terminal's capacity by 50% in 2H 2023, and will add another 50% by 2026.

High freight costs for spot ethylene cargoes could narrow that price advantage and close arbitrage windows at times, but US sellers expected to overcome such hurdles.

The ethane advantage was expected to support strong downstream MEG production as well despite weak demand for PET bottling.

China, the largest global consumer of MEG, has gained popularity as an export destination, despite vast capacity additions aimed at increasing self-sufficiency. However, poor margins in Asia have discouraged production, making US MEG more attractive, sources said.

US MEG exports to Europe are expected to continue at subdued levels amid antidumping duties ranging from 3% to 60%, depending on the company.

Oversupply is expected to linger barring a significant disruption such as a hurricane coming ashore on the US Gulf Coast, where MEG production is centered. Sources noted, however, that 2Q 2023 production outstripped demand, so stocks should be ample enough to offset outages.

Asia sees continued ethylene oversupply

In Asia, ethylene market participants expect the status quo of an oversupplied and stale ethylene market to continue amid weak demand amid high interest rates, volatile upstream prices, and China's sluggish domestic recovery.

Asian downstream MEG markets also saw continued weak margins and economic uncertainty, traders said.

Suppliers said reduced production rates in Asia would continue until margins strengthened, with output seen remaining low for the next few years, sources said. MEG plants could transition from economic run cuts to permanent capacity shutdowns of older, inefficient plants where possible, sources said.

Upcoming MEG capacity additions in 2023 could cancel out such rationalizations, but new startups could be delayed given a shaky macroeconomy and inflation, traders said. Downstream textile and bottle-grade PET demand has lagged MEG supply, source said.

Market observers said the coal-based MEG units already built could start at a lower rate, given the investment already put in place.