20:01 PM | June 10, 2019 | Gregory DL Morris
|MEGlobal's greenfield ethylene glycol plant at
Freeport, Texas, is nearing mechanical completion.
In contrast to the confidence around schedules that are mostly under the company’s control, the near-term outlook for global EG markets remains less clear. “The last few months have been a learning experience for those of us in the glycol market,” Ramachandran says. “It was amazing how quickly the markets got bearish in December and January just based on chatter about possible tariffs.”
The global market for EG is about 30 million metric tons/year, and the clear majority goes into polyester fiber for fabric and polyethylene terephthalate (PET) resin. Growth is a robust 4–6%/year worldwide and the new MEGlobal capacity will allow the company to optimize its global supply chain. Equate, the second-largest global maker of EG, is a joint venture among Kuwait’s state-owned Petrochemical Industries Company (PIC), Dow Chemical, and local Kuwait investors. PIC and Dow each hold a 42.5% stake.
Trade tensions have unsettled the market. “There was always a tariff on glycol into China,” Ramachandran says. “It was 5.5%. Now the talk is 10% or as much as 25%. Nothing material has changed yet—there has been no collapse in demand or spike in supply—but the uncertainty has created so much chaos that there has been a $400/ton destruction in price [since mid-2018]. For a 30 million metric ton market, that is $11 billion in value destroyed.”
Prices will normalize over the long term, but Ramachandran remains concerned about structural changes that could impact the global market. One concern is the demise of what had been the standard global pricing index. Another is shifts in what had been centralized downstream markets.
“Traditionally glycol has been traded on an Asian index,” Ramachandran says. “The tariff uncertainty has created so much chaos that people have exited that exchange. The index may become irrelevant by the end of this year. Again, not for any material change in the market, but because of the uncertainty.”
While EG is a commodity, the market volume is much smaller than widely traded commodities or even other petrochemicals. “In aluminum or oil futures, there is significant liquidity,” Ramachandran says. “Those are fair clearinghouses. In glycol, the index is not truly an index. Sometimes we see five deals and two of those are between traders, not producers and consumers.”
Equate is evaluating ongoing participation in the EG exchange. “It is entirely possible that we might exit the exchange,” Ramachandran says.
markets in transition
China accounts for about 54% of the global glycol market. It imports 9.5 million metric tons/year of EG, and exports about 5 million metric tons/year of EG equivalent via polyester. “Any [market] change will really affect clothing and sneaker makers,” Ramachandran says. “We may have to go back to regional markets.”
That could mean fragmentation of the industry. “Demand for the fiber is so strong across the world, but local consumption for domestic uses is small” in most regions, Ramachandran says. “The export market is the major driver. There is a low bar to entry, and there is little cost advantage left in China. Once a staple-fiber plant is built, which only takes about nine months, it is going to run. The supply chain shift downstream is both swift and permanent.”
Even in such an eventuality, MEGlobal and other major producers are likely to survive, but Ramachandran wants to thrive. “Our customers need to make money for us to make money,” Ramachandran says. “For that we need transparency in the market. If the business goes to regional markets, fine. Those still need to be credible reflections of buyers and sellers, not paper traders. That is where we are.”