Where to begin

Progress in US-Iran talks has reduced the geopolitical risk premium, pulling down crude oil prices. This has removed a key support for upstream costs in the PX-PTA-MEG chain. The market is now pricing in a return of August plant operations, with the cross-period spread for PX and PTA showing a bearish back-spread logic.

In the short term, the market is following crude oil's downward correction. Polyester chain profits have seen some recovery, and valuations are rising. The PXN has bottomed out and recovered, PTA processing fees have rebounded, while polyester product profits have fallen. With crude oil prices declining, valuations across the polyester chain have somewhat improved.

Why the outlook is bearish

The US and Iran are reportedly making smooth progress in negotiations over the Strait of Hormuz. The US plans to announce an agreement today, leading to a short-term drop in the geopolitical risk premium and a pullback in oil prices. In the medium to long term, WTI is expected to trade in a wide range of $70-90 per barrel. US midterm election needs will cap oil prices, while seasonal refinery restocking and SPR replenishment provide a floor.

On the supply side, the restart of some PX and PTA units has not met expectations. Fuxing 1.6 million ton PX maintenance has been delayed. Yisheng Da Lian 3.75 million ton PTA unit is undergoing scheduled maintenance. Overseas, there are few changes this week. On the demand side, the off-season has resulted in fewer downstream orders. With the US-Iran talks showing progress, the reduction in geopolitical risk premium has lowered costs, leading to low sales volumes as buyers hold off on restocking, waiting for further price drops. Attention should be paid to pre-peak-season restocking activities as raw material prices decline.

The fundamentals balance is slightly bullish. PX and PTA unit operating rates have not improved as expected, while polyester operating rates have seen little change. The fundamental picture shows a significant destocking trend.

A closer look at MEG

The outlook for MEG is also bearish. The US-Iran talks have shown a breakthrough, reviving expectations for the Strait of Hormuz transit, which will restore long-term MEG imports. Domestically, there are many units under maintenance, but with improved margins, there is potential for higher operating rates at both oil-based and coal-based units. The off-season demand is weak, with few orders for downstream products. The drop in the geopolitical risk premium has lowered costs, keeping sales volumes low as buyers wait for lower prices.

With the easing of geopolitical tensions, MEG's current situation is tight, but the fading risk premium is weakening the monthly spread. The strategy is to go short on EG outright as the Middle East situation eases. The nearby months are more affected by the geopolitical premium, pointing to a bearish back-spread. For the distant months, MEG has more new capacity coming online, making its fundamentals weaker than TA. A cross-variety spread trade of long TA and short EG can be considered.

Valuations are bearish, with falling oil product prices dragging down MEG prices. Naphtha-based profits have rebounded sharply, while coal-based profits have fallen. Supply is slightly bullish. As of July 31, China's overall MEG operating rate was 52.68%, down 0.64% week-on-week. Ethylene-based capacity utilization was 49.66%, down 0.88%. Non-ethylene-based MEG operating rate was 57.9%, down 0.21% week-on-week. Imports are a positive factor as the Strait of Hormuz blockade persists, delaying the recovery of Middle East MEG imports. There is a MEG shortage abroad, increasing exports from China. Net imports have dropped significantly year-on-year. Demand is bearish. Two polyester units started this week, but Guxian Dao 900,000 ton unit is shut for electrical upgrades, slightly lowering the polyester operating rate. End-user restocking appetite remains weak. The balance is bearish. The US and Iran are close to an armistice, with the Strait of Hormuz expected to reopen, shifting the long-term MEG fundamentals from tight to loose.

PTA price review

The PX9-1 spread strengthened. The US and Iran are making smooth progress in the Strait of Hormuz control talks. The US plans to announce an agreement today, leading to a short-term drop in the geopolitical risk premium and a pullback in oil prices. In the medium to long term, WTI is expected to trade in a wide range of $70-90 per barrel. US midterm election needs will cap oil prices, while seasonal refinery restocking and SPR replenishment provide a floor. Naphtha prices followed crude oil lower, with the Japan CFR mid-price at $836.5/ton, down $116.3/ton week-on-week. PX CFR Taiwan was $1001/ton, up $20/ton week-on-week. The PXN and short-process profits strengthened. The PXN was at $241.5/ton, up $90.3/ton week-on-week. The PX-MX spread recovered significantly, with PX short-process profit at $126/ton, up $43/ton week-on-week. Gasoline cracking spreads in the US, Europe, and Asia fell from highs. Asian naphtha cracking profits fell, while chemical-type reforming profits began to improve. From a fundamental perspective, tight crude oil and naphtha supply supported prices. However, on the demand side, high crude oil prices led some producers to use alternative feedstocks, while the profitability of downstream ethylene cracking units weakened. The economics of blending xylene and toluene improved relatively. PTA basis and monthly spread strengthened, and spot processing fees bottomed out. Early in the week, the spot basis range moved from 09+120~140 to 09+120~126, then concentrated at 09+125~135 during the week. By Friday, the spot basis strengthened slightly to 09+135~145, with some major suppliers selling at 09+150~155. Warehouse receipts transacted at 09+90. The PTA processing spread was weak this week, generally in the 300~400 yuan/ton range, with a weekly average of 349 yuan/ton. On August 3, the PTA main contract closed at 5854 yuan/ton, up 230 yuan/ton week-on-week. The MEG basis and 9-1 spread both strengthened. MEG prices moved up sharply, with spot highs trading to 5420-5430 yuan/ton, and the spot basis strengthening to a premium of 300 yuan/ton over the 09 contract. By Friday, MEG prices corrected, and the spot basis weakened noticeably. However, due to a lack of liquidity in the MEG market, actual transaction volumes decreased at lower levels. On August 3, the MEG main contract closed at 4924 yuan/ton, up 143 yuan/ton week-on-week. Polyester product profits all fell.

Supply and demand data

Polyester capacity additions in 2026 are higher than in 2025. There are many new polyester projects planned for 2026, with an expected capacity addition of 5.47 million tons, a growth rate of 6.14%, higher than 2025. In terms of category, due to many bottle-grade chip units starting up in 2024 and 2025, profits have been low. In 2026, there are few new bottle-grade chip projects planned, only two units from Fuhai (300,000 tons) and Kesen New Materials (400,000 tons), totaling 700,000 tons. In contrast, filament yarn capacity additions have been low in the past two years, leading to significantly improved profits. Filament yarn will be the main capacity addition in 2026. In the first quarter, two units started up, totaling 800,000 tons. In April-May, 1.01 million tons of capacity came online, mainly involving filament yarn, chips, and bottle-grade chips. As bottle-grade chip profits improve, units from Hanjiang and Anhua have start-up expectations. Polyester operating rates fell slightly. As of July 31, the polyester operating rate was 79.69% (-0.3%), with filament yarn at 73.88% (-0.41%), staple fiber at 75.65% (0%), and bottle-grade chips at 74.52% (-0.39%). From January to June, polyester net exports were 7.4108 million tons, up 3.1% year-on-year. Cumulative polyester exports were 6.207 million tons, up 3.1% year-on-year. Bottle-grade chip exports totaled 3.208 million tons, down 1.1% year-on-year. Filament yarn exports totaled 2.155 million tons, up 1.9% year-on-year. Staple fiber exports totaled 847,000 tons, up 4.7% year-on-year. Polyester products saw slight inventory accumulation. Staple fiber rights inventory days were 7.54 days (+0.21 days). DTY at 30.6 days (-0.2 days), FDY at 30.4 days (+1.2 days), and POY at 26.5 days (+1.5 days). Polyester chips at 4.52 days (-0.18 days), and polyester bottle-grade chips at 8.8 days (+0.02 days). Staple fiber sales rates recovered, while filament yarn sales rates fell slightly. The five-day average sales rate for staple fiber was 76.4%, up 13.8% week-on-week. The five-day average sales rate for filament yarn was 38.4%, down 3.1% week-on-week. The five-day average sales rate for chips was 47.9%, down 11.7% week-on-week. Finished product inventory days increased, while raw material (polyester yarn) stocking days fell. As of July 30, the average finished product inventory level for end-use weaving (long-fiber fabric) was 18.48 days, an increase of 0.46 days from the previous week. The market is in the off-season, with overall performance weak. Fabric market transactions are mainly for immediate needs. Current market demand for conventional fabric varieties is relatively average. Large and long-term orders remain scarce, further strengthening factory production cut intentions, and manufacturers are cautious about the future outlook. As of July 30, the average raw material (polyester yarn) inventory level for end-use weaving enterprises was 8.42 days, a decrease of 2.28 days from the previous week. Unstable geopolitical conditions have intensified foreign buyers' wait-and-see sentiment, leading to a clearly conservative procurement pace. Volatile raw material prices and a lack of large orders support have kept textile enterprises' restocking enthusiasm low. They are currently replenishing only for immediate needs, waiting for a buying opportunity. Downstream order intake is average. As of July 30, the operating rates for warp knitting, air-jet, water-jet, circular knitting, and printing and dyeing were 46.2% (0%), 52.5% (-0.17%), 56.54% (-0.22%), 35.74% (0%), and 49.32% (0%), respectively.

PX capacity additions in 2026 are concentrated in the second half of the year. In 2026, 3.97 million tons of new domestic capacity are expected to be commissioned, a growth rate of 9.1%. This includes an expansion of 300,000 tons at Fujia Dahua, 2 million tons at Huajin, and 1.5 million tons at Jiujiang Petrochemical (which may be delayed). In terms of timing, Fujia Dahua's expansion is expected to produce output early in the year. Jinling Petrochemical restarted at the end of May, expanding capacity by 170,000 tons to 870,000 tons. Huajin is scheduled for the third quarter of 2026, and Jiujiang Petrochemical will not start until the fourth quarter. Therefore, the main PX supply pressure will be felt in the fourth quarter. Shandong Yulong Petrochemical's 3 million ton unit can only produce MX and has not yet obtained the production license for PX, with its start-up expected to be delayed to 2027. There are few new overseas PX units in 2026, with only Indian Oil Corporation (IOC)'s 800,000 ton unit scheduled for the second half of 2026, primarily to supply feedstock for downstream PTA units. Chinese PX operating rates and overseas rates have seen little change. Domestically, Liaoyang Petrochemical's 700,000 ton unit has a one-week maintenance plan for the end of July. Zhongjin Petrochemical's 1.6 million ton unit is scheduled to restart at the end of July or early August. Fuxing's 1.6 million ton unit is planned for a restart at the end of July, but is currently expected to be delayed, with a specific date to be tracked. Overseas units have seen little change this week. The domestic PX operating rate is currently 62.58%, unchanged week-on-week. The Asian PX operating rate is 59.64%, down 0.08% week-on-week. Domestic PX production in June was 2.897 million tons, down 2.1% month-on-month and 10.2% year-on-year. In the first half of 2026, China's cumulative PX imports were 4.502 million tons, up 0.02% year-on-year. June imports were 482,000 tons, up 0.04% month-on-month and down 37% year-on-year. There are no new PTA capacity additions in 2026. Due to the shutdown of units at Luoyang Petrochemical (325,000 tons), Yizheng Chemical Fiber (350,000 tons), Yadong (750,000 tons), and Sanfangxiang Phase 2 (1.2 million tons), totaling 2.625 million tons of capacity that has been idle for over two years without current restart expectations, they have been removed from the base as of year-end. From January 1, 2026, the mainland China PTA capacity base is adjusted to 92.09 million tons. In 2026, there are no new PTA units, easing the pressure of new capacity. PTA exports in June were up 9.8% month-on-month and 40.3% year-on-year. In the first half of 2026, PTA exports totaled 1.891 million tons, up 1.8% year-on-year. June PTA exports were 358,000 tons, up 9.8% month-on-month and 40.3% year-on-year. Domestic PTA operating rates recovered from low levels. Zhongtai Petrochemical's 1.2 million ton unit and Dushan Energy's 3 million ton unit returned to normal operation this week, while Yisheng Da Lian's 3.75 million ton unit entered scheduled maintenance. The PTA operating rate was 55.26%, down 6.7% week-on-week. PTA warehouse receipts fell from highs. Total social inventories of PTA continued to decline significantly. According to the latest inventory data from Zhongpu, as of July 31, total PTA social inventories continued to fall sharply, decreasing by 15.9 tons week-on-week to 1.837 million tons. This included a decrease of 79,000 tons in warehouse receipts, a decrease of 110,000 tons in in-port and in-warehouse inventories, an increase of 6,500 tons in PTA plant inventories, and an increase of 14,000 tons in polyester plant inventories. MEG capacity additions are concentrated in the fourth quarter, with a high growth rate. In 2026, there are four units scheduled for start-up, mainly oil-based, totaling 2.75 million tons. The MEG capacity addition rate in 2026 is expected to recover to 9.2%. BASF's unit started up in early 2026. The other three units are scheduled for the fourth quarter, with the second and third quarters being a gap period for new capacity. MEG production in June was down 8.6% month-on-month and up 1.5% year-on-year. In the first half of 2026, MEG production was 9.956 million tons, up 2.2% year-on-year. June MEG production was 1.55 million tons, down 146,000 tons month-on-month and up 23,000 tons year-on-year. Coal-based MEG maintenance increased, leading to a sharp drop in non-ethylene-based operating rates. As of July 31, China's overall MEG operating rate was 52.68%, down 0.64% week-on-week. Ethylene-based capacity utilization was 49.66%, down 0.88% week-on-week. Non-ethylene-based MEG operating rate was 57.9%, down 0.21% week-on-week. For ethylene-based units, Gulei Petrochemical's 700,000 ton unit restarted. Yuan Dong Lian's 500,000 ton unit is scheduled to restart in mid-August. Zhejiang Petrochemical Phase 1 and Phase 2 saw slightly higher operating rates. Shenghong Refining's 900,000 ton unit is scheduled to restart in mid-August. For non-ethylene-based units, Xinjiang Tianye Phase 3 (600,000 tons) originally planned a one-month maintenance shutdown in August, which is now delayed. Yangmei Shouyang (200,000 tons) is in maintenance from mid-July, lasting about three weeks. Hong Sifang's (300,000 tons) operating rate is increasing. Tianying's (150,000 tons) technical upgrade is complete and is currently restarting. Woneng (300,000 tons) is in maintenance from early August to August 20. Meijin (300,000 tons) is expected to produce output in early August. Zhonghuaxue (300,000 tons) is restarting. Zhengdakai (600,000 tons) is in maintenance from the end of July for about 40 days. Falling oil product prices dragged down MEG prices, leading to a sharp rebound in naphtha-based profits and a fall in coal-based profits. In the first half of 2026, MEG imports were down 80.1% year-on-year, while exports surged. In the first half of 2026, China's total MEG imports were 2.58 million tons, down 32.9% year-on-year. June MEG imports were 123,000 tons, down 38.5% month-on-month and 80.1% year-on-year. In the first half of 2026, China's total MEG exports were 339,000 tons, up 368.9% year-on-year. June MEG exports were 98,000 tons, up 13.2% month-on-month and 1019.8% year-on-year. MEG port inventories fell slightly. As of July 31, MEG inventories at East China main ports were 416,000 tons, down 28,000 tons week-on-week. Expected arrivals fell sharply to 39,000 tons, while outflows fell from highs. MEG plant inventories increased significantly month-on-month, while polyester plant inventory days continued to fall. As of July 31, polyester plants' MEG raw material stocking days were 12.1 days (down 0.7 days week-on-week). MEG plant inventories in June were 480,000 tons, up 30,000 tons month-on-month and 171,000 tons year-on-year.

Supply and demand balance estimates

In the second quarter, due to limited crude oil supply, PX units reduced operating rates following refineries, but the overall decline was not large, and operating rates were relatively high year-on-year. Downstream PTA units entered a concentrated maintenance season starting in April, and some manufacturers faced raw material shortages, leading to PTA operating rates falling to multi-year lows. The PX fundamentals became marginally looser. In June and July, with the shutdown of several large units like Shenghong and Weilian Chemical, operating rates will enter the year's low point, making the PX supply-demand balance even tighter. In the fourth quarter, with the start-up of new units and the arrival of the downstream off-season, PX will begin to accumulate inventory. In the second quarter, affected by insufficient raw material PX supply, PTA units underwent seasonal maintenance, leading to a significant drop in output. This situation will continue until July. Exports fell year-on-year due to new overseas unit start-ups. The fundamentals showed a large destocking in May, June, and July, with a narrowing destocking pace in August. In the fourth quarter, as supply recovers and the off-season arrives, the fundamentals will shift to an inventory buildup. Entering the third quarter, due to continued uncertainty in the US-Iran situation and whether the Strait of Hormuz will be navigable, import volumes remain low. Domestically, non-ethylene-based MEG maintenance increased. As profits fell, operating rates declined from highs. Overall, the production increase in the third quarter compared to the second quarter is limited. Assuming the Strait of Hormuz reopens in August, imports will slowly increase starting in September. Downstream polyester units will also increase operating rates and restock. The fundamentals will maintain a destocking state in the third quarter.