SunSirs: Ethanol: Weak Demand Weighs on Market; Costs and Maintenance Provide Downside Support

In May, the domestic spot ethanol market experienced overall volatile downward movement. Prices for standard-grade ethanol in Northern Jiangsu retreated from 5,953 RMB/ton at the end of April to 5,779 RMB/ton, marking a monthly decline of 2.92%. The market as a whole exhibited a pattern characterized by cost-based support, persistently weak demand, and synchronized price declines across various regions. The interplay of three key factors—divergent trends in raw material markets, periodic plant maintenance shutdowns, and the downstream sector entering its traditional off-season—dominated price movements in May. Looking ahead to June, market conditions are expected to remain stable but with a downward bias, constrained by the prevailing imbalance between supply and demand.

I. May Spot Market and Regional Price Trends

Throughout May, domestic ethanol prices generally retreated in a stepwise fashion, with regional markets weakening in tandem. In the Northeast—a core domestic production hub—some manufacturers saw inventories accumulate and became more eager to offload stock; consequently, spot quotations were the first to trend downward, establishing the region as the lowest-priced price trough in the entire market. In Henan, local plant operating rates fluctuated slightly; however, with fewer trucks arriving at factory gates, manufacturers faced pressure to move inventory and adjusted their quotations downward, following the lead of the Northeast. The East China market, buffeted by low-priced supplies flowing in from the North and compounded by sluggish follow-through in local demand, saw its spot quotations trend lower amidst volatility. The specialized segment for food-grade ethanol also performed tepidly; early in the month—following the holiday period—the pace of downstream business resumption was slow, hindering traders' ability to move stock and causing prices to soften slightly. Supported by raw material costs, manufacturers largely opted to adopt a wait-and-see approach to defend their price levels. As the month progressed into its middle and latter stages, the "off-season effect" intensified; purchasing driven solely by immediate, essential needs became the market's dominant theme, the overall trading atmosphere grew increasingly subdued, and spot quotations across the entire market began a generalized retreat.

II. Domestic Capacity, Output, and Supply Landscape

On the supply side, the market exhibited characteristics of localized reductions alongside overall stability. In May, several production units in the Northeast underwent routine maintenance shutdowns; consequently, the region's overall operating rate dropped to 44.32%, resulting in a 6.34 percentage-point month-on-month decline in monthly output. In the East China region, production units continued to operate at low utilization rates over the long term, limiting any potential increase in supply volume. Meanwhile, production units in other regions maintained stable operating rates, leading to a slight overall contraction in total industry output. Entering June, Northeast China is scheduled to undergo a concentrated maintenance cycle, which will lead to a further reduction in regional supply. Coupled with the continued low operating rates in East China, the overall supply side is expected to contract, thereby providing a temporary floor of support for spot prices.

III. Current State of Upstream and Downstream Demand

Weak demand is the primary catalyst behind the current downturn in ethanol prices, as both major downstream consumption sectors have simultaneously weakened. In the chemical sector—where ethyl acetate serves as the largest downstream consumer of ethanol—plant operating rates declined in May. The traditional "off-season" for end-users has dampened raw material procurement volumes, resulting in a continued contraction in demand for chemical feedstocks. Other fine chemical categories have maintained only routine, rigid-demand replenishment, with no instances of concentrated stockpiling. Meanwhile, baijiu (Chinese liquor) consumption has entered its traditional off-season as temperatures rise; consequently, the pace of end-user inventory building has slowed, and distilleries' raw material procurement volumes have declined month-on-month, further narrowing the scope for ethanol demand. Across the entire market, there have been no new large-scale procurement orders; instead, downstream players have adopted a widespread strategy of purchasing strictly on an "as-needed" basis while maintaining tight control over raw material inventories. As a result, the demand side is currently unable to provide any effective upward impetus to prices.

IV. Upstream Raw Material Prices and Cost Analysis

Ethanol raw materials fall into two main categories: corn and dried cassava chips. The divergence in the price trends of these raw materials has created a mixed cost landscape, characterized by both bullish and bearish factors. Regarding dried cassava chips, procurement volumes in the key production regions of Thailand and Vietnam have declined, tightening the supply of overseas feedstock. Consequently, import prices remain firm at high levels—with Bangkok FOB quotes at $260/ton and Vietnam CNF quotes at $270/ton—keeping the production costs for cassava-based ethanol persistently high. Conversely, corn prices have remained stable but with a slight downward bias; remaining grain stocks in China's major production regions now stand at less than 10%. The substitution of corn with new-season wheat, combined with the conclusion of auctions for reserve rice, has weighed on the corn market, causing prices to trend lower in a volatile manner and resulting in a slight decline in production costs for corn-based ethanol. This "high-and-low" raw material dynamic has created a structural divergence in costs across the industry: while cassava-based ethanol enjoys strong cost support, the cost pressure on corn-based ethanol has eased. Collectively, this scenario establishes a cost floor for the market, thereby limiting the potential for a deep decline in spot prices. V. Outlook on Overall Market Trends

For the domestic ethanol market in June, the supply side is expected to benefit from the completion of concentrated maintenance activities in the Northeast region, leading to a gradual reduction in market availability. This factor, coupled with cost support derived from high prices for dried cassava, diminishes manufacturers' willingness to sell at low prices; consequently, the downside potential for spot prices is limited. On the demand side, the traditional off-season is expected to persist; operating rates for ethyl acetate production are unlikely to see a significant rebound, while baijiu consumption continues to contract. As the volume of essential demand struggles to expand, the market currently lacks the fundamental drivers necessary to support a price rally.

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