Polyester (PET) pricing outlook - Q2 2013

PET SECTOR

In the NA region demand has gradually improved from the last couple of months, but seasonal purchase  pickup is still in the absent.  There should be a surge in demand as Easter holidays approach at the end of March and this momentum should be maintained given by that time seasonal demand would have also picked up.  So with current raw materials being flat and PET producers wanting to increase price, many buyers are holding off purchases but some going ahead with purchases.  The nominated increase of 4 – 5 cents will probably translate into an increase of 2-3 cents for February and then March should remain flat before it starts trending up as April commences.  Demand in Brazil and Argentina remains very good with M&G 550 ktpa Brazilian plant and Argentinean DAK America’s 150 ktpa running at 100% utilization rate. 

A pessimistic atmosphere prevails in Eurozone.  Strengthening of Euro has prompted purchase from off shore manufacturers.  Inventory buildup is continuing at a slow but steady pace and an inching up of price to Euro 1320 DDP was being sought.  This seems unlikely as the raw materials have softened after the Chinese New Year break.  With many global expansions coming up, it is expected that regional reorganization of the PET industry may come about.  Demand in Russia, CIS and Ukraine is strong and big purchases have occurred in preparation of the new season.  Buyers see that an increase in price in the coming months is almost certain.  Offers have ranged of $1600 LC 90 day mark. 

PET resin market in Asia Pacific region has remained lively and a sense of anticipation has been felt for the direction of market movement.  Beverage production in China has increased @ a rate of 11% over 2011, which signals strong growth and export increased by 31% over 2011, targeted to the growing markets of South America, Middle East, Africa and surprisingly West Europe as well.  Production rationalization has allowed operating rates to improve to 63% with 10-15 days of inventory.  Exports to Japan increased by 7.4%.  Korean producers are looking towards China to understand what probable direction pricing will take as early spring is expected.  Thailand is emerging from its low season with demand remaining strong as converters continue to build inventories.  It would be correct to say that “the level of activity later in February may depend on the perceived direction of raw material prices.”

Euro : $ Parity:

For the Euro $ parity the trend dependency will be defined in the short and the medium term by the economic policies of the 2 economic zones.  US government focus on implementing spending cuts to improve its budget deficit and at the same time ensuring stable GDP growth, would have to be dealt with very carefully as it simultaneously may want to decrease asset purchases, resulting in reduced liquidity in the market.  So while the Democrats want to shift extraneous cash outlays in non-productive ventures while ensuring greater government liquidity, asset purchases can stifle economic activity and increase unemployment.  So both these transitional approaches cannot be done concurrently but at best in succession.  Quantitative rationing would come in the medium term and interest rates may go up placing an upward pressure on $ as and when this happens.  For the Eurozone, it appears that Euro should stage a recovery in the short to medium term, because some of the ailing economies i.e. Spain, Italy and Greece are maintaining bond yields, retiring debt, and instilling changes in their financial systems, which should consolidate the Eurozone effort.  Political mongering may continue but all economies are working reasonably cohesively.  Also the inflation and real interest rate variables are in favor of Euro. 

It is strong likelihood that Euro will ensure a recovery and trend over US$ in the short term but in the medium term in the backdrop of Quantitative rationing by Obama may put $ in a stronger position and this could occur in middle of Q2.

A level of recovery has already begun in the Euro.  The blue line is indicative of a uptrend in the Euro even though it may be very slow.  In the current economic environment a strong Euro may have a limited impact on demand development, but it should help in that direction. 

Crude Oil:

Inventories have mounted with an upturn in output putting a downward pressure on price.  As we see from the graph the downward momentum is quite high, which would mean that Crude prices could possibly weaken to the $90 mark and release pressure on MX-PX supply chan.  PTA producers may resist drop in price in an effort to recover losses, which would mean that PET cost base will only be reduced at a slow pace.  The next upswing could be brought about in 2-3 weeks. 

CONCLUSION:

Going into March cost base will remain soft, Euro should strengthen, and crude oil price weaken.  This should exert a downward pressure on PET pricing, but coming mid March, there can be an upturn in crude and PET season commencing, demand could return.  March pricing should remain flat.  

PTA & MEG - Q2 2013

PTA & MEG

In the North American sector PTA prices have been computed based on a formula and settled @ 67.22 c/lb, an increase of 2.83 c/lb over the preceding month.  The cost pass through has been easier, and PET prices are expected to increase proportionally.  The European markets have remained sluggish, amid the complex Eurozone economy, and pass through of cost has remained slow.  A seeming glut is being witnessed  in the Northeast Asian and Chinese market, and PTA producer’s profit margin has remained below sustainable level.  Major factor contributing to this is the slow PET sector incapable of absorbing the increasing new PTA capacities.  PTA recovery is tied to uptick in PET demand which remains unlikely in the short term, but as seasonal PET demand return seemingly imminent in the medium term, late March early April, PTA recovery would ensue. 

MEG global supply has remained tight, but with its price being indirectly linked to PX (heavy Naptha) side of the supply chain, MEGlobal February nominated settlement of $70/ton over January may not hold as crude oil prices have retreated.  The resistance of settlement in Europe will be even higher given a recovering Euro, even though $ had recently strengthened because of an environment created by the Fed.   Stocks in China are at a comfortable 700,000 Mt’s (4 week inventory), which seems to suggest a balanced market.  Some shutdowns in the Middle East are expected to constrain supply, but this may not be crippling.  So with a tight supply chain balance, it is expected that March would be a roll over as the cost base, now soft, will at best remain flat.  

Mixed Xylenes and Paraxylenes - Q2 2013

MX-PX

The MX part of the value chain has remained in good demand/supply balance in all Global sectors.  An arbitrage window opened for the Western Europe market for supply to North American and Asian region because MX increase was being resisted by proportional PX increase.  With lower value being registered for MX, there was some arbitrage.  In essence what this meant was a cost push in the European sector was not being felt due to the sluggishness of the economy as opposed to Asia and North America markets which remained responsive. 

The US PX contract settlement for February was proportionally higher than Asian contract settlement.  The greater than parity settlement was part of the recovery of the previous month, but is wide enough to limit PET arbitrage opportunities into the North American market from Far East.  PX-PTA supply chain is well balanced in all sectors except Asia, where PTA overcapacity dominates.  Spot values in Asia seeming very volatile, and can lead to spot arbitrage opportunities, but with contract defining the logic of the market, arbitrage opportunities will remain very limited and will not affect supply demand conditions.  Barring any unprecedented crude oil pricing shift, PET pricing should remain flat at best as crude oil prices are softening going into March.  Traders have been speculative in the Northeast Asian region by taking PX long/short positions; in face of increasing demand as new PTA plant startups take place in China.  This combined with the speculative nature of the crude oil segment, which currently remains soft, could bring volatility in the Heavy Naptha (MX-PX-PTA) side of the supply chain.  But with  currently modest downstream demand from the PET sector any cost push impact will remain buffered. 

POLYESTER BOTTLE GRADE RESIN - MAY/JUNE 2011

Finally Indorama has partially restarted PET production at Decatur, and should resume to optimum production once PTA supply issues from BP’s PTA plants is fully restored, which as of date appears to be in startup phase.  In the meantime, the supply chain has continuously become tighter.  Due to depleted stocks, some converters have had supply disruptions as well.  Selenis has successfully started its PET facility in Canada and also M&G has recovered from its earlier force majeure at Apple Grove.  All plants that are not dependent on BP’s PTA appear to be operating normally.  However, as June & July are peak season times, it is evident that price decline, due to softening PTA, may face resistance due to downstream pull and a  tight supply chain imposed through MEG, upstream, route and downstream via converters.  A peculiar situation has set in, whereby, PTA in the international market is softening, which would make imports more competitive, however, many downstream converters have been able to easily sustain and in the case of Nestle, been able to increase price by 10%.  So the interplay of these multiple factors, PTA shortage, MEG global price increase due to global shortages, softening of overseas PET prices in light of weakness in PTA leading to the threat of import, and the high season in NA, are adding to the complexity of this market.  Best analysis for future pricing would be price reduction at a decelerated rate, to limit imports.

Downstream demand in East and West Europe remains quite strong as converters are operational at +90% levels.  A temporary price bubble that had been developed as the downstream textile polyester sector in Far East remained extremely bullish prior to the contractionary monitory holds imparted by the Chinese government that allowed downstream prices in Europe also to reach unprecedented levels.  But now the pressure situation has let off some steam and subsequently offshore prices have started to appear more economical.   Some producers were hoping that price should further maintain the downward trend in the European market.  However, with the strengthening of MEG, in light of the global shortage, and PET from Far Eastern manufactures heading for the NA market, support has been given to PET pricing.  AlcoNaptha PTA plant now is fully operational which is helping in the maintenance of a very balanced supply chain. 

In Japan there is a healthy downstream demand, particularly in the mineral water sector.  Firstly the downstream pull is high due to seasonal demand.  Further, nuclear radiation which was an aftermath of the recent earthquake, there is an apprehension by the consumers for safe consumption of mineral water from the local producers and therefore, this requirement is being fed by imports.  This is exemplified by the fact that Seven Eleven convenience store has started to import bottled mineral water from Taiwan, Korea and USA.  A total import of 72 million water bottles is being planned for the summer.  Korean prices currently have risen slightly to over $1600 fob levels and exports are a challenge in the European market specifically with the appreciation of the Won.  This resultant upward price movement is following raw material changes, with PTA softening and MEG strengthening.  Further, exports to Japan for bottled mineral water remain strong.  A similar situation is being witnessed in Taiwan where operating rates are near the 90% mark.  The Chinese market is also operating at a similar rate.  Although regional prices have decreased somewhat, due to monitory holds in China, however, there has been a steady buildup of off shore demand, particularly in the North American, South American, Japan as well as East Europe.  It should noted that Japan, Russia and Ukraine account for 40% of Chinese export destinations.  Similarly local downstream demand has been high as restocking at converter

POLYESTER STAPLE FIBER -PSF (DOWNSTREAM-MAY/JUNE 2011)

The sales to output ratio currently is maintained above 100%, which shows steady, but by no means robust, downstream demand in the East Asian and Far East Asian regions.  Many market players were of the view that in order to maintain basic margins, amidst stringent Chinese government monitory controls, it may even be necessary to impose production cuts.  Inventory had increased to over 20 days, an industrial metric signaling caution.  Domestic prices remained on a downward trend in China falling to Rmb 28, 100 from Rmb 30,000/ton in April and this downward trend has continued ever since.  Dangers of overcapacity were announced when idle capacity at Xianglu (180 ktpa) and Luoyang (50ktpa) came online.  Cotton prices have also been of direct interest to PSF producers and some have remarked that the product substitution to polyester is slowing down, as cotton futures decline.  Due to not very favorable market conditions Nan Ya and Tainan were planning cuts in their staple fiber outputs.  Since the high season of textiles is nearing an end, the 2011 forecast of PSF does not appear too healthy in the Eastern economies. By contrast the sales of PSF in the North American market have remained reasonably strong, and substitution away from cotton to polyester still remains, particularly in the Mexican region.  Non-Woven’s and fiberfill businesses remain quite strong.  The major concern for many producers right now is the non-availability of PTA, brought about by the force majeure at BP's plant at Decatur as well as problems at the Cooper River, SC plant.  Producers have been able to work around the situation by using inventories and stalling orders, and now are hoping for an immediate resolution to the startup of the Decatur plant.  Currently these plants are in startup mode. 

A recent non-woven’s exhibitions in Switzerland, observers were convinced that PSF sector of the European economy had fully recovered from the recession and that there was good demand.  PSF During 2010 this stood at an estimated 900,000 MT's and is expected to rise.  Of this sector hygiene constitutes 37% of the total & wipes 16%.  Application of wipes is not only limited to personal hygiene but is extends to domestic duties, healthcare and industrial applications.  2011, Q1 has also witnessed an increase in the construction applications of non-woven’s, which includes roofing and constitutes 18% market share of non-woven’s.  Auto sector also continues to flourish given that there are more than 40 parts made from non-woven fabric. May prices were at Euro 2.15-2.20/kg, and there was a downward pressure on PET with low cost imports from Asian economies posing a threat, especially at a point in time when anti-dumping duties on some of these Asian nations is nearing an end.   MEG side of the component cost is on steady incline, due to global and regional shortages, which may lend support to the maintenance of PET prices even though lower cost imports do pose a threat.  The imports have the potential of countering any cost push price increase. 

FILAMENT YARN (DOWNSTREAM-MAY/JUNE 2011)

In the Far Eastern economies there is an expectation that feedstock price, specifically PTA, may decline further.  Therefore, downstream buyers have therefore held of their purchases and in some cases asking for discounted prices.  This is slowing down filament producers sales.  A multitude of reasons have  resulted in price reductions; power restrictions, restrictive monitory policy, international oil prices have reduced feedstock costs, but also raised speculation amongst buyers that prices would further reduce, which has further retarded sales.  2010 was a year of record profitability which resulted in the injection of 2 million tons of filament expansion for 2011.  Now this is being seen as a surplus in the short term leading to a bearish sentiment in this sector.  In Taiwan, there has been a steady build up of inventory to 20 days.  A stock of 15 days is considered a good indicator of downstream demand, which seems to be waning right now.  This has resulted in steady erosion of prices to NT$88-90/kg in May from NT$ 96-98/kg during April for DTY 75 den.  In light with the market scenario many producers are bringing forward their plant turnarounds.  Local and export volumes remain weak. 

In NA, the BCF business has steadily grown to over 25% compared to the same period last year.  However, a general weakness in the market is beginning to impact BCF sentiment.  Although there has been capacity enhancement, but producers feel that the overall market conditions should improve if BCF is to continue to grow as it has in the recent past.  Carpet producers continue to introduce different styles and differentiate product to enhance sales.  The automotive sector continues to perform strongly, but the shortage of PTA induced by force majeure of BP PTA, is a major cause of concern, casting doubt on availability.  This specifically at a time when the automakers are expecting to sell over 13 million pieces in 2011, which should provide enough momentum to downstream demand, and will help stabilize feedstock pricel. Even though apparel sales have remained steady, but knitters and woven fabric producers are being very prudent in holding onto stocks.  The home furnishing sector has remained calm, but the automotive sector continues to do well.  Texturizing rates have been quite good, and especially air jet texturizing for the automotive sector.  Internationally, due to declining feedstock prices, imported material has started to make its way into the market as both POY and textured yarn have become competitive with local production. 

MEG (DOWNSTREAM) - MAY/JUNE 2011

In congruence with a general global shortage of MEG, North American market was also experiencing a shortage due to the frequent Old World International production issues at its 315ktpa plant at Clear Lake.  Currently Shell is also on its 3 weeks turnaround at its 400ktpa plant at Scotford.  Further there are turnarounds expected at Dow (284 ktpa) and ME Global (386 ktpa) at Fort Saskatchewan and Seadrift respectively.  Luckily PET outages due to tornadoes have reduced MEG downstream demand and with the onset of high season, as these plants come out of their outages, it appears that demand on imported MEG will not let up.  with an already depleted international supply situation and the domestic availability a bit jittery, there would be an upward pressure on the price of this feedstock. 

For the European market, there has been some movement in terms of purchases volumes of the downstream sector.  However, MEG outages by Clariant @ Gendorf, PKN Orlen @ Plock and by BASF @ Ludwigshafen, are exasperating supplies (Note that BASF is an EO supplier which is a feedstock for MEG).  Again this shortfall will have to be taken mainly from Middle East, where output has remained restricted due to major plant turnarounds.  There has been strengthening of the Euro which would further help in keeping the prices of MEG steady.  With this stabilizing effect, and a short supply situation, again an upward price pressure on MEG will be maintained in Europe. 

In the North East Asian market there has been some rebound in the demand of the polyester sector which increased the demand-pull on MEG helping price recovery to $1125/ton cfr levels during June from $1080/ton cfr levels during mid April.  There has been a rebound in demand chiefly in the Chinese, Korean and Taiwanese markets.  Operating rates in the Korea are in 90% region which is indicative of good downstream demand.  Further this demand is intrinsically linked to the Chinese market, where downstream operations have also picked up.  This is indicated by some output recovery at the Textile City in Shaoxing, China, reaching levels of 5.7 – 5.9 million meters, during Mid June, up from 3.9 million meters/day.  Further downstream sales to output ratios have also slowly gone over a 100%.  This renewed increase in productivity is a function of a high season, and the restrictive monitory policies are just giving enough impetus to keep the industry moving at a pace strictly driven by supply & demand equilibrium, which could have been prone to overheating if restrictive measures were not put in place. 

In Taiwan, FPC #1 olefins unit in Mailiao plant has been down since mid May, as there was fire in the upstream pipelines.  This has caused closure of associated Nan Ya's associated MEG plant #1 and plant #2 due to lack of ethylene.  Start June, the government agencies demanded a more extensive shutdowns for safety inspections.  It is believed that a MOU has been signed which would allow a closure of Nan Ya's # 3 plant by June 15th and the # 4 plant by June 20th.  These inspections will probably be conducted well into July

Many plants in Japan were down not too long ago due to power shortages experienced as an aftermath of the earthquakes.  Mitsubishi took a turnaround at its facility at Kashima and also the 115 ktpa plant of Maruzen came out of its turnaround at Chiba.  These factors have successively contributed to the tightening position of MEG in North East Asia as well as East Asian countries, which has facilitated MEG prices to make a rebound.