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.  

PTA (UPSTREAM) - MAY/JUNE 2011

Due to the fact that april paraxylene settled high during April, the parity with Asia was disrupted in the face  of rapidly falling spot prices during that month.  However, this left no room for confusion for May, and with April ACP continuing to decline the settlement in North America came early and without contention during the start of the month.  May was settled at 81 cents/lb down 4.5 cent/lb compared to ACP fall of 3.86 cents/lb.  This higher than parity settlement with Asia was under the premise that first of all NA PX parity with ACP has widened too much, and with falling crude oil price, a long MX position reducing cost push as well as a long PX, there was no reason to take an aggressive stance in adhering to  a benchmarek PX price.  With a  long PX postion it is estimated that the BP’s Decatur plant may be possibly made to start end June. 

The European market appears to be in good balance.  The May drop of Euro 100 was in line with PX ACP movement.  There was not much spot activity as prices fell for the most part of May.  Given the spot prices of $1500 cfr, a reasonable spot price of $1550 was deemed as practical for European market.  The supply chain has remained quite snug ever since.  TOTAL had an outage of MX which constrained PX supply, but now the situation has resumed to normality.  PKN Orlen’s PTA  output is reaching a 100% operational rate, which goes to show that its captive PX plant may well be running at high efficiency as well.  Generally there appears to be no length or shortness in the market.   Market pundits appear to be of the opinion that the market may remain balanced until the start-up of Artlant’s new PTA capacity in Spain during 2012, which is still a long way away.  In light of falling crude oil prices and a global long supply situation, the price of PX was settled @ $1605 late May and June spot prices have continued to float at the $1500 levels or slightly lower than this. 

PX position in China has remained weak amidst a wavering foundation of feedstock prices and issues of oversupply are also playing a part in price softening.  S-Oil’s new 900ktpa production capacity at Onsan in Korea is running now at full rates and the restart of CNOOC production in China in mid April, after a 45 day shutdown, is further adding length to the market.  There is also additional supply from Urumqui in China.  Further downstream demand is moderate and PTA suppliers have been sufficiently stocked as of start June.  The  notion of downstream demand being created by the start up of 2,000 ktpa Zhejiang Yisheng plant in Ningbo seems to be dampened with the negativity surrounding monentory tightening of the chinese government which could deter downstream demand in the mid term; and possibly for the rest of 2011.  

PARAXYLENE (PX) UPSTREAM MARKET - MAY/JUNE 2011

Due to the fact that april paraxylene settled high during April, the parity with Asia was disrupted in the face  of rapidly falling spot prices during that month.  However, this left no room for confusion for May, and with April ACP continuing to decline the settlement in North America came early and without contention during the start of the month.  May was settled at 81 cents/lb down 4.5 cent/lb compared to ACP fall of 3.86 cents/lb.  This higher than parity settlement with Asia was under the premise that first of all NA PX parity with ACP has widened too much, and with falling crude oil price, a long MX position reducing cost push as well as a long PX, there was no reason to take an aggressive stance in adhering to  a benchmarek PX price.  With a  long PX postion it is estimated that the BP’s Decatur plant may be possibly made to start end June. 

The European market appears to be in good balance.  The May drop of Euro 100 was in line with PX ACP movement.  There was not much spot activity as prices fell for the most part of May.  Given the spot prices of $1500 cfr, a reasonable spot price of $1550 was deemed as practical for European market.  The supply chain has remained quite snug ever since.  TOTAL had an outage of MX which constrained PX supply, but now the situation has resumed to normality.  PKN Orlen’s PTA  output is reaching a 100% operational rate, which goes to show that its captive PX plant may well be running at high efficiency as well.  Generally there appears to be no length or shortness in the market.   Market pundits appear to be of the opinion that the market may remain balanced until the start-up of Artlant’s new PTA capacity in Spain during 2012, which is still a long way away.  In light of falling crude oil prices and a global long supply situation, the price of PX was settled @ $1605 late May and June spot prices have continued to float at the $1500 levels or slightly lower than this. 

PX position in China has remained weak amidst a wavering foundation of feedstock prices and issues of oversupply are also playing a part in price softening.  S-Oil’s new 900ktpa production capacity at Onsan in Korea is running now at full rates and the restart of CNOOC production in China in mid April, after a 45 day shutdown, is further adding length to the market.  There is also additional supply from Urumqui in China.  Further downstream demand is moderate and PTA suppliers have been sufficiently stocked as of start June.  The  notion of downstream demand being created by the start up of 2,000 ktpa Zhejiang Yisheng plant in Ningbo seems to be dampened with the negativity surrounding monentory tightening of the chinese government which could deter downstream demand in the mid term; and possibly for the rest of 2011.  

Mixed Xylene Pricing (MX) - May/June 2011

Initially Mixed Xylene prices were not factoring much into the Paraxylene prices, however, during the escalation of crude oil prices during April, when it was above the $110 range, the cost push impact was being felt at MX level affecting Paraxylene as well.  Now that the crude oil price has dipped to below $100 / barrel, the MX settlement has gone in a state of flux with the sudden lapse of feedstock prices which had lent it support.  April as well as May prices, of $4.3152/gal & 3.75-3.85/gal respectively, were settled as the average of spot, during the later part of the month.  June should be heading in a similar direction.  The downward movement was also seen for the West European as well as the Asian market where the MX prices aped crude oil movement.  European prices fell from mid $1300 levels to $1230-1240 levels from April to mid May.  Similarly for Korea, at $1300-1325/ton fob, and Northeast Asia, at $1330-1340 cfr range during April fell to ~ $1205 fob Korea. 

Other than crude oil price downward movement, an impact of oversupply due to force majeure of BP’s 1,100 ktpa paraxylene plant in North America, has made the supply situatuion long.  This has helped in maintaining the downward price sentiment of MX atleast in this market.  

POLYESTER PRICING OUTLOOK DURING MAY 2011 (Q2 ANALYSIS)

What we have seen from our previous discussion is that different segments of the polyester value chain have been working independently.  However at a holistic level these segments have had an impact on polyester pricing.  Mixed Xylenes cost push impact on Paraxylene was witnessed as the crude oil prices breached $100/barrel. In fact a direct relationship was seen on Paraxylene as the price escalated to $113/barrel. Subsequently with the decline in crude oil to below $100 a parity drop in North American market was witnessed. Further with better sentiments emerging in the European market on the supply of Paraxylene, and keeping in mind parity fluctuation with the Chinese market, a drop was also witnessed. PTA supply positions have remained snug in North America, short in Europe and long in the Far East (i.e., 2000 ktpa start-up of Yizheng Ningbo by mid 2011). With North American PTA pricing being a factor of Paraxylene and being influenced by Far Eastern markets, a softening sentiment has pervaded the North American market. Interest rates have been raised by 25 basis points 4 times since the start of 2011, and intermittent increases by as much as 4 times, until the end of Q3 of 2011, are expected in China. A sufficient slow down in feedstock pricing has already been seen and if these additional monitory controls are executed, then prices should continue softening for the rest of Q2? Or will a depleted supply chain look to replenish inventories in the backdrop of a high season boosted by demand? MEG side of the business remains stronger, with a general global shortage. KSA's Yanpet, Jubail united (~ 1250 ktpa), LG Chem, Daesan, Samsung, Nan Ya (>600 ktpa), EO outages at Huntsman, Old Worlds turnaround and Ineos Oxide etc. are all contributing to supply tightness. 

In the West and particularly North America there is a robust demand of polyester filament and Polyester staple fiber (PSF) in the automobile sector. Upholstery business is making steady gains as well. Further can the demand for polyester in the apparel sector be attributed solely to higher purchasing power of consumers? A closer inspection reveals that this is more a product substitution away from cotton which stood at a historic all time high of $2.1102/lb in March 2011. So increased demand of polyester is indicative of consumer's preference to making a substitution away from the more expensive cotton and is not pinpointing to a better economic climate dictated by improved consumer purchasing power. The consumption of consumer textiles have been on the decline, which is being shown in the carpet retail purchases as well as decrease in the demand for wet wipes and a rather lackluster home furnishing sector. Bottle grade PET resin demand is picking up due to seasonality and with tight inventory position it can be expected that downstream demand pull will be maintained. This would result in reasonable operating rates throughout the supply chain and ensure a balance of stocks. So with polyester resin demand being maintained due to seasonal impact, as well as a thriving filament and staple fiber sector, we would see steady price changes in the North American market impacted by feedstock price movements. An arbitrage window of Far Eastern resin is likely to open up if there is a price surge during mid to late Q2. The impact of low imports levels, which were the case during most of 2010, will start changing as off shore resin begins making inroads to a more attractive North American market. Similarly with PTA supply issues still impeding in European market, PTA imports would be needed to maintain the downstream operating rates. Not only for PET, but, this would also lend support to currently ailing international PTA prices. Further off shore demand would also help stabilize PET prices in the Far Eastern economies as they take the export avenue. Sales-to-output ratio of many Chinese polyester yarn plants has finally increased to over 100%, which signifies an upturn in demand in the textile sector. But will the additional interest rate increases expected till the end of Q3 have a mitigating affect on demand and thus smother any chance of price strengthening? This remains to be seen. 

Chinese macroeconomic activities will have a far-reaching impact in the medium term on Polyester Pricing. To cap the increasing inflation in this economy internal policies have led to the increase of reserve ratio holding of banks, credit limit capping in foreign currencies; lastly and most importantly interest rates have been periodically raised 4 times during the last five months. These financial provisions have been made to decelerate the GDP growth rate to around 8%, which is being seen as a pre-requisite to curtailing inflation. The impacts of these provisions are beginning to manifest in industrial slow down. While the 2nd largest global economy has a vision of diversification with their large inflow of foreign currency, which will further strengthen Renminbi, the Western economies are actively trying to stabilize a rocky boat. Government debt restructuring remains a top priority EU's economies of Greece, Ireland, Portugal and Spain and an effort of regulation has remained a painstaking process for implementation in United States. While the impact of GDP slowdown, via monitory regulation, should be a relatively quick implementation in Chinese economy, the process of stabilizing Western economies will remain a grueling process. 

Lately what has been witnessed is that Chinese polyester and feedstock prices have set global benchmark. These prices have had some economic reasoning, however, artificiality, to limit arbitrage, has defined bias for action. The above indicators paint a picture of Western economies trying to chalk a way out their economic quagmire. Consumer sentiment is sedate, which has had a calming impact on demand. These sentiments have also not been conducive to sustaining robust oil futures, but have lent stability. Middle Eastern crisis, still don't have the depth to aggravate oil supply concerns but can be moderate influencers. Therefore there seems to be no imminent threat from high crude oil prices in the near future, but spikes can emerge. 

In light of the above facts, it appears that polyester resin downward spiral may be losing its momentum, with Western economies showing stable downstream demand as a sluggish economic U-turn is underway. However, if as expected, interest rates are ramped up periodically in the Chinese market, by some experts as much as 4 more times till the end of Q3, future polyester prices would be adversely impacted. So while a low point of PET @ $1550 fob may have reached during May for Far Eastern suppliers, however, continued interest rates rise may allow PET resin pricing to operate within a narrow range of $1550 fob. They could max out at $1650 fob as 2011 high season unfolds, before they start retreating due to seasonal downturn. Downstream demand in the Western economies may be helpful in price stabilization in the medium term, but they may be prime facilitators during 2012.

So for the short-term, we expect a further price reduction. Although an Asian FOB of mid $1400's would mean being pessimistic, but a further reduction to $1500/ton fob is still a possibility before price starts ascending. In the medium-term, till the end of Q3 of 2011, a slow upward trend, may allow pricing to stabilize again to the mid $1600 levels, but price breaches of the likes +1900 fobs would remain anecdotal reminders of the possible impact of complex market behavior. In the long-term, improved consumer & industrial demand in the Western economies will be facilitators for maintaining strength and stability in the market. 2012 would be the year to watch for sustained demand emerging from the West. 

POLYESTER RESIN BOTTLE GRADE DURING APRIL & MAY 2011

The PET resin demand is strengthening as the summer season approaches.  Coupled with this sentiment it should further be noted that the supply chain is quite tight in North America.  Low inventories are being experienced throughout the supply chain for a multitude of reasons.  Firstly the winter volumes were uncharacteristically high, which allowed better off-take. Further the perception that demand would start waning as winter approached, which impeded the need to stock high, was proven wrong.  Further in light of high pricing, downstream users the purchase decision has remained delayed.  The above reasons have resulted in a very tight inventory position and a need to restock at the converter level.  An increase in demand seems forthcoming as resin volumes have remained good in the CSD as well as the water sector.  Still due to heightened demand, PET producers are operating at high capacities and report to be sold out.  Further the imports have been declining and this can be assessed in fall of imports of 25% during the first quarter of 2011 when compared to the corresponding period of last year.  Therefore to compensate for this lost supply, there would be a shift of supply from Export to Local requirement for NA producers to alleviate the supply tightness.  It was anticipated that PET prices would increase by another 4-5 cents/lb during April, but with PX rolling over from it higher limit settlement, and then subsequent decline in feedstock, the revised settlement in all likelihood would be anywhere between 0.5-1.5 cents increase. 

In the South American market there has been a falloff in demand as the low season has begun.  The market has experienced demand as high as 8-12% over the last year.  However, the local supply situation remains tight given the second force Majeure of M&G that happened on April 20^th.  This closure which has been brought about by power issues is expected to remain till the middle of May.  This has tightened supply not only in Brazil but also Argentina.  Import prices remain in the region of $2000/ton.  There was a small force Majeure at DAK, Argentina; but now this is over and the slowdown in demand is happening at a faster rate than Brazil. 

With the resumption of PTA availability in Europe, PET resin plants have started operating at 100% capacity as backlog of orders is cleared.  Purchases have been held off by converters, with the expectation that price corrections in the sector are underway.  The odd thing to be noted over here is that inventories are thin in the supply chain, and a resumption of purchases should commence as the high season approaches.  Converters hope of PET price correction is a bit far-fetched, but reasonable price adjustments of raw material have been witnessed.  This has a direct consequence on PET pricing.  At the pricing end, what’s being witnessed is that PTA producers, given the recent spate of force majeure, want to enjoy good margins over PX as demand is expected to remain healthy with the onset of PET season.  However with PX losing ground, majority of PET producers who formula price on PX, will result in downward pressure on PET; this ultimately would have an impact on PTA pricing as well.  By end April the delivered prices of PET (polyester resin bottle grade) had gone down to €1515-1545/ton, and by May a downward trend has ensured further decrease in the low €1400’s. 

It was hoped that a lot of domestic demand would be served after the start of production of AlcoNaptha at Kaliningrad.  However, due to recurrent PTA supply issues the plant has been operating at 60% operational capacity.  So with the ease of supply of feedstock, greater output would be available for the market and less reliance on imports.  Good weather around the Crimea and Ukraine will assist demand for beer and CSD.  With the erosion of feedstock prices, PET prices have also decreased in the Far East, but margins have remained reasonable.  A lot of PET is still being exported out of Korea and Taiwan to Europe, to furnish unfulfilled demand.  Initially there was a notion that in light of decreasing prices, a high crude oil price which had started impacting PX would restrict a price fall in PET, and somewhat ensure trading within a narrow band.  However, with the drop of crude oil below $100/barrel, this notion has changed.  Currently PET prices are trying to stabilize from the free fall being experienced during start May when prices have reached $+1600 fob levels.  Operating rates remain as high as 90%.  The Chinese market has been affected by the tight monitory policy as well as financing limitations due to  exposure limits in international currencies have increased cost of financing.  This has ultimately affected the margins.  Further, in order to increase operating rates, the Chinese producers have been pricing aggressively which is another reason for some loss in margins for them and further downward pressure on price.  It is generally felt that shortages of PTA and MEG in the supply chain will help in stabilizing the downstream pricing.  Average operating rates have remained reasonably healthy in the region of mid 80%.  Far Eastern Shanghai is operating at 90% and Zheijan Wankai at full capacity.  Sanfangxiang has shifted production to bottle grade PET resin away from PSF, and currently is running at a rate of mid 70%.  So output does not really remain slack, but is being managed at a control rate.  

POLYESTER STAPLE FIBER (PSF) DOWNSTREAM SECTOR DURING APRIL/MAY 2011

Tight monitory policy has reduced the final demand for apparel in China and the inventories have grown to over 20 days.  The utilization rates are not very low, but they have fallen from the high 90’s to 85% currently.  Cotton grade 329 fell from Rmb 32,000/ton to Rmb 30,000 /ton maintaining a premium of Rmb 16000 over polyester.  This premium has ensured substitution to polyester.  It would be interesting to review the impact of cotton pricing on polyester and aslo noteworthy to understand how cotton market change as December 2011 futures stand at 1.26 cents/lb, down from record actual of $2.1102 /lb experienced recently in March.  Lower cotton futures would negatively impact the polyester prices.  Taiwanese producers have been able to maintain operating rates at 95%, but the domestic demand has remained a little quiet during April with the hope that pricing may come down further in the near future. 

In the US and Canada, cotton substitution is taking place at a rapid pace. Utilization rates for RPET and Virgin PET have increased to more than 100% and one producer is considering bringing up a long idled polymerization and extrusion plant online.  Import substitution has been going on, with low-melt and conjugate fibers being manufactured indigenously.  In the apparel sector retailers and brand houses are moving some of their Asian outsourcing back to CAFTA region.  Fiberfill and non-woven sectors are also on the rise.  Due to BCF shortage, substitution has come from polyester staple fiber.  Keeping in perspective this good downstream demand, staple producers announced a 7cents/lb increase, but due to customer resistance to this increase, a more modest increase has been sought.  Price stability is seen as the summer season approaches, which would also be helped by the PET demand in the beverage sector.  In Europe, market for hygiene and wet wipes remains strong.  Automotive sector demand remains quite strong as well.  Demand of polyester in construction and roofing sector has also improved, but demand from geotextiles and fiber fills remains flattish.  

POLYESTER FILAMENT YARN DOWNSTREAM SECTOR DURING APRIL/MAY 2011

In the eastern economies polyester filament demand has remained uncharacteristically low at a point in time, when demand normally is strong.  Inventories in China have steadily grown over 25 days.  Downstream weavers and knitters report that they are have not been able to pass along raw material cost and labor cost effectively.  Further power shortages at Jiangsu and Zhejiang provinces have adversely affected productivity.  Tight monitory policy also has had an unfavorable impact on demand.  With these relatively large inventory levels, it is expected that output and subsequently demand can only pick up at a slow pace.  Further PTA and MEG rampant outages, will ensure that raw material supplies will remain in reasonable balance globally.  Taiwanese market has also experienced some eroding of demand due to high prices, and advancement of turnarounds is being seen.  Similarly production utilization rates fell modestly due to shrinking of demand in the Indian economy. 

In the North American market, other than the Bio-Component Filament (BCF) sector all other filament sectors are very strong.  Retail activities for the carpet sector, which is the prime consumer of BCF; have slowed down due to repeated prices increases.  Apparel business and upholstery business are making steady gains.  Texturising is running at high capacity and the automotive sector, which is the main driver of industrial polyester producers, demand for tyre and belting products continues to grow.  For the European market, home furnishing sector is reasonable, but by no means strong.  However, in contrast there is a sustained demand for filament in the automobile sector.  So we see signs of renewed demand in North America and somewhat in the European region, but it apparent that this demand may not have enough steam to pull up the productivity levels of the upstream market (PTA & MEG), in the short term.  But eventually an arbitrage window should open up, which would allow an uplift of plant activities. 

MEG (UPSTREAM) APRIL & MAY 2011

The domestic demand of MEG has started to pick up significantly as PET season is underway.  Amidst the tight monetary policy spot prices in China softened to $1060-1070 before recovering to $1100 level.  This weakness in the market allowed MEGlobal, Sabic and Shell to reduce their prices.  However, the supply/demand balance in the USA in light of Old World turnaround and scheduled shutdown of Shell at Saotford, Canada, MEG inventories are considerably tight.  Further Huntsman was also out of the market with shortages of EO, which has somewhat ensured MEG tightness.  Just reviewing the supply position producers are trying to roll over the prices for May.  However, these market players have a close eye on the Far Eastern economies, and may want to maintain parity with Asia, so that the composite cost of production of Polyester remains under check, and not open an arbitrage window for imports.  In Europe a similar situation of turnarounds at Ineos Oxide at Antwerp, PKN Orlen at Plock, Ineos Oxide at Dormagen, BASF and Clariant sales curtailment in face of their turnarounds has considerably tightened output.  However, demand for MEG has been rather constrained, which has been brought about by reduced demand of the PET sector due to availability of PTA.  The main factor to contend with in this market is resumption of PET demand, which would create a demand pull on MEG as PET high season approaches. 

The polyester fiber industry remains uncertain for the Indian market.  However, PET resin demand has started picking up, and PSF demand remains reasonable with filament demand ailing.  Downstream users are reluctant to accept high prices caused by increased raw material costs.  Many consumers are holding back purchases with the hope that prices may fall further.  Operating rates in Taiwan and Korea remain high as domestic demand has gone up with the onset of the PET season.  The availability has tightened considerably as LG Chem took down its 125ktpa plant in Daesan for a 30 day turnaround and Samsung has also started its 120 ktpa turnaround in Daesan as well.  Nan Ya’s No. 1 350 ktpa plant went down due to mechanical issues.  Therefore, MEG supplies have considerably tightened, but then this represents a very small portion of the production pool and can only have marginal impact on supply.  For China a multitude of reasons have transpiring to reduce demand.  Firstly PX prices have been moving downwards and subsequently MEG.  When the prices were on the rise for PTA (PX), speculative interest in MEG also drove its price upwards.  Now that the reverse is occurring, we see MEG move in the same direction as PX and PTA.  Similarly lowered demand due to power outages in Jiangsu and Zhejiang provinces has lowered demand.  Further foreign debt quotas has also hurt the intermediate markets, as some producers and traders have not been able to raise LC in foreign currencies, which are restricted due to credit limits.  Even with many Middle Eastern turnarounds happening, mainly in KSA, Globally a tight supply position remains for MEG, and this is underscored by the increase of MEG prices once it had reached $1060-1070 and then made a recovery back to $1100-1110 cfr levels. 

PTA (UPSTREAM) APRIL & MAY 2011

Paraxylene settled at a rollover at 85.5 cents/lb in the NA market, however, PTA settled a little higher at 71.50 cents/lb against March’s 70.97 cents/lb. New factors in the formula price had started factoring in light of rising crude oil prices; finally a cost push from MX was being felt.  However, downstream demand is moderate compared to March.  Many PTA producers were wary of the fact that PX settlement was high during April, which now could pose a threat of imports into the North American market, given the rapid decline of this feedstock in the Asian market.  In Europe, Lotte UK another force majeure due to catalyst change is putting strain on supply of PTA.  Further it was expected that 600 ktpa startup of PKN Orlen would suddenly ease the market, given that Cespa in Spain’s has diverted all production to San Roque PET facility and is out of the market for PTA supply.  However, repetitive outages of Lotte has ensured a tight PTA supply position as PKN Orlen is expected to commence commercial output by May.

The general notion in the Northeast Asian market has been that once textile inventories reach a low threshold, a demand pull would emerge for polyester.  This remains to be seen.  Some source suggested that the inventories of PTA had fallen to a low level, and that resumption of demand should be imminent.  However, other sources contended that price needed to fall significantly, before polyester operating rates could be increased.  Further Chinese interest rates were finally having a dampening impact on polyester demand.  Further Yizheng Ningbo plans to start up its 2000 ktpa PTA plant by mid 2011; this additional supply will result in a downward pressure on PTA prices.  Operating rates in China remained in the 70-80% in April, where as Korean operating rates remained in the region of 90%.  Similarly Taiwanese facilities maintained a high operating rate.  Also the intermittent shutdown of Capco and FCFC has allowed the supply to remain tight.  PTA inventories in Chinese market remains within in a normal range.  Some new huge expansions in the filament sector should allow for increase in demand in the medium term.  However, the economic climate brought about by governmental measures of repeatedly increase interest rates, has now surely affected downstream demand and subsequently plant productivities.  Further there have been electrical power limitations in Jiangsu and Zhejiang provinces which have negatively impacted the plant productivities.  

PARAXYLENE-PX (UP STREAM) MARKET DURING APRIL & MAY 2011

NA PX price was a roll over of March @ 85.5 cents/lb.  In contrast to this Asian settlement price of $1690 /lb fell to $1600 levels during April in wake of weak downstream demand particularly the fibre sector.  However, the NA producers were of the opinion that the relatively tight availability of PX in the market allowed a settlement of roll over, even though conditions in Asian markets had changed at a time when NA settlement was taking place.  However, the general notion of tightness of supply in the North American market is fading away with Exxon Mobil production issues at Beaumont site coming to an end.  It is believed that turnarounds at Flint Hills Resources (500 ktpa) are also ongoing.  Further an import window has also opened up, as the parity of NA PX with Asia has been ajar for some time, thus improving the likelihood of the availability of PX via imports.  Further the logic that has supported this settlement has been increase of 10-11 cents/lb of MX due to higher crude oil prices.  So what we have seen is higher feedstock prices starting to finally impact downstream Paraxylene (PX) price, which, given the narrow range of crude oil movement when crude was below $100/barrel, had remained detached from Mixed Xylenes (MX).  However, analysts are aware that the parity with Asia has generally widened too much, and this would inevitably bring down the price of PX in the NA market.  In the European market the point of view has been less clear, as downstream demand has remained a little hard to read.  Some customers had pushed back deliveries and there was lack of interest of spot material, which has lead to a marginally less than a rollover price settlement for April.  At the same time, hope of the startup of PKN Orlen PX and PTA start up at Plock in Poland, and the resumption of Gadiv is helping to ease market supply sentiments.  Another force majeure at Lotte, Wilton had been expected to last at least throughout April.  So with availability of PX at PKN Orlen in Poland, the PTA output at Plock facility will certainly ease an impending supply concerns.  So even in Europe the settlement will be at a differential with Asia + freight, which should take it to $1650 levels.  Currently complete ease in supply of PX is still not being seen. 

In the East Asian economies the PX spread over Naptha was already unsustainable and  the Japanese Earthquake further helped PX spike to over $1800; however, this was short lived and prices had fallen considerably to $1600 levels in April.  Amongst the salient factors that have resulted in price reduction on PX has been primarily the lack of demand of the downstream polyester fiber sector in China, and with plenty of new production coming up, 1000 ktpa Urumuchi’s PX startup, S-Oils 900 ktpa startup in Korea and the 45 days maintenance turnaround of CNOOC in China will boost supply in that region.  PTA producers in China, in wake of reduced downstream demand from PSF sector have brought forward their turnarounds, which has in turn again reduced demand for PX.    The Middle Eastern political unrest may have pushed up the crude oil prices to > $110/barrel levels, however, the downward correction of PX has already taken place as price of crude oil have fallen lower than $100 / barrel.  PX in the recent past has remained detached in price fluctuations of crude oil, but with price of barrel reaching $113 levels, the element of Mixed Xylenes (MX) had started playing a part in Paraxylene costing.  Since now, again, the price of crude oil have retreated the foundation which MX was providing to PX has been taken away, which would mean that PX would come under a price pressure.  In Japan, many damaged plants are back in production, however, JX’s Sendai, Kashmina refineries & Cosmo Oil’s Chiba refinery still remained closed.  This has been more than compensated with new plant outputs making their way.  The main concern for Japanese producers remains sale/production output ration in China of Polyester Staple Fiber (PSF), which seems to have slowed down amidst the restrictive economic measures taken by the Chinese government.  Clearly, now even for the Japanese producers, it is not about output, but downstream demand.  

MIXED XYLENE MARKET (UPSTREAM)

Mixed Xylenes (MX) have remained strong in the North American market and Far East.  In North America MX price went up from 4.00 $/gal to 4.27 $/gal from March to April.  This has limited trade activities with Asia, as such prices have limited profitability for exports from North American.  Increase of crude oil, reaching ~ 113 WTI, has remained the main cost driver of MX.  Further in the European markets, there has been a demand for this feedstock by Paraxylene  producers, but again, these prices have remained unattractive.  Asian markets tightened as an aftermath of the earthquake and tsunami increasing by $200/ton, however, Chinese inventories were high at that point, and with a new production of 1.2 mtpa coming up, this shortage was easily filled up.  So there was a sudden shock, which seems to have quietened down.  However, with recovery in Japan occurring at a moderate pace, there has been a slight tightening of supply, and this coupled with recent dip in crude oil prices, has taken some steam out of this feedstock, but it still has a potential to impact downstream sector if there is a reversal in crude oil in the short run. 

POLYESTER MARKET NEWS+

1. Reliance has announced that it has started the implementation phase of building a PET plant in Dajeh, Gujarat with a capacity of 540ktpa.  This plant would be commissioned during 2013-14 with the option of further expansion of 540 ktpa. 

2. China National Chemical Engineering (CNEC) has announced the plans of a JV with China Chengda Engineering and an undisclosed 3^rd party to build a polyester and a polyamide complex that would produce 1000 ktpa PTA, 500 ktpa of PET & 40 ktpa of polyamide 6,6. 

3. Indorama has announced to build by 2013 a polymerization plant at Purwakarta, Indonesia.  The plant would have a capacity of 300 ktpa. 

4. Silgan Holdings has showed interest to acquiring Graham Packaging for $4.1 billion.  This would be subject to shareholder and regulatory approvals.  This acquisition which will lead to the formation of a new entity called Silgan Graham Packaging, would lead to the development of the biggest blow molder in North America with an expected sales of $6.2 billions. 

5. Severe storms in Southeastern USA Alabama region caused the breakage in supply of TVA electrical power grid.  BP PTA at Decatur, AL and Indorama AlphaPET plants has been down since April 28. 

6. MCT Pet has initiated its PET business from 1^st April in Japan.   

7. Hengli Chemical Fibre plans to start a total of 450 ktpa plant in 2011 in China.  During the 1^st phase a 225 ktpa PET bottle resin plant will start at the end of June 2011.  Expansion site of a further 225 ktpa plant has still not been decided.  However, Hengli has very ambitious plans for an additional 800 ktpa polymerization unit at Yingkou in Liaoning province.  

MARKET NEWS

1.       Additional annualized capacity of 440,000 MTs now available in the European market. 

2.       Ouro Fina expands to include energy drinks.  It has invested $880 k to expand its portfolio.  New product is marketed under the name “Insane”.  It is currently available in Parana and Santa Catarina and is to be launched in Sao Paulo.  Maguary, a concentrated fruit juice producer in Brazil, has launched a 500 ml bottle. 

3.       The restoration of PTA production at BP & PK Orlen’s, has worked towards alleviating the supply of PTA in Europe.  However, the outage of Lotte Chemical’s has been a source of concern. 

4.       CQ PET (CEPSA), who has purchased Artenius San Roque PET plant, has restarted production on March 17^th, and it now understood to be running at nameplate annualized capacity of 165 ktpa. 

5.       Additional online capacity of San Roque and Alconaphtha, at Kaliningrade, will allow for an availability of 344,000 MT’s of PET resin in Europe.  It should be noted that 40% of Alconaptha’s capacity will be for local consumption. 

6.       Indorama has announced that it plans to build an additional 200ktpa PET plant in Europe at a brownfield location.  The expansion is scheduled to be completed in 2013 and would take its regional capacity of 1.3 million tons. 

7.       The purchase of PTA/PET business of Eastman chemicals at Columbia SC, by DAK, Americas was completed by end January.  The deal includes PET production capacity at 2 plants totaling 675 ktpa and PTA capacity of 570-600ktpa of Integrex technology developed by Eastman at Columbia, SC.  Eastman will retain PTA production of estimated 250ktpa at Kingsport TN.

8.       Far Eastern New Century (previously Far Eastern textile) will set up a 60:40 JV with Sinopec yizheng Chemical fiber for 100 ktpa PTA project. 

9.       A planned turnaround at Ineos Antwerp has kept Ineos out of the spot market all year so far. 

10.   Selenis is expected to begin production at its facility in Montreal before end of March with product to trade in Q2

11.   SK Eurochem has been acquired by Indorama.  

Pepsi ‘green’ bottle made of corn husks, pine bark

PepsiCo Inc has developed a bottle made from plant-based, renewable resources that is fully recyclable, and will start using it in a test program next year.

The company’s new “green” bottle is currently being made from materials such as switch grass, pine bark and corn husks. In the future, components for the bottle may include orange and potato peels, oat hulls and other byproducts left over from the company’s food business.

PepsiCo’s chief scientific officer told the Reuters Food and Agriculture Summit Monday that the company was working on ways to reuse such waste.

On Tuesday, PepsiCo announced that it has found ways to create a molecular structure identical to petroleum-based PET for a bottle that looks, feels and protects products just like existing PET containers.

The company said it would pilot production of the new bottle in 2012 and then move to full-scale commercialization if it was successful.

Rival Coca-Cola Co already produces a “plant bottle,” which is 30 percent made with sugar cane. It is expanding use of that packaging and efforts to convert the remaining 70 percent of its bottle to a plant-based material.

PET PACKAGING RESIN (DOWNSTREAM)

The utilization rates for PET producers were up in the high 80’s from low 80’s in Q1 of 2011 as compared to the ending quarter of 2010 as demand was strong during this time.  This can be true as some packaging options were changed to PET bottles.  Tropicana’s change PET bottles from cartons was indicative of this.  There is a forecast of higher demand as we head into Q2, as the high season approaches.  Although the output rates have been marginally higher there has been no news of production curtailment due to raw material shortages, mainly PTA and PX shortages.  In the European market, prices have steadily crept up to the mid 1600 Euro level for delivered resin.  Preformers / bottlers seem to be caught in the middle, with fillers resisting price increases.  However, inventories in the supply chain are very thin, as a price drop was expected after lunar year holidays.  There was a temporary price hike hiatus but then again gradually in light of rising raw materials PET prices have started followed.  This has been difficult for the converters to pass along, specifically the small to medium converters, which have lower bargaining leverage with fillers.  A notion also persists that with such price increases substitution to other packaging types i.e., glass, aluminum should be considered, however, high entry barriers due to high capital investment appears to dampen the chances of such a switch. 

The 6.5% anti-dumping duty imposed on Turkish imports from many far eastern suppliers has been allowed to lapse, as the consumption of 240 ktpa, outstrips the production capacity of 140 ktpa.  Imports are essential in the short term.  Some Korean producers feel that in light of current feedstock prices, PET prices could rise as high as $2000.  Earlier, faced with raw material shortages, it was felt that many European customers were bound to purchase resin; however, this seems to have changed with the lifting of force majeure of BP PTA plant.  In the Chinese market in comparison to fiber business, PET resin makers for packaging are still facing some margin issues, which they would like to recover.  FOB’s have been hovering around high $1800 levels, and with pressure on PTA, brought about with the PX shortage being faced by Nippon’s PX plant of Japan, there is an upward trend on pricing.  Chinese 0.25% increase of interest rates has had limited impact on the equities and future market, and it appears that a more stringent action may be necessary to bring prices into check.  Therefore, the notion of price correction looms in the future.  

POLYESTER STAPLE (DOWNSTREAM)

For the Far Eastern economies, finished inventories are still low, and with the textile season coming up there would be build up of downstream demand.  This is evidenced by the fact that textile grade resin sales to output ratio has increased to over 100% over the last couple of weeks, as downstream customers try to cover their order backlogs.  Further there is also a notion that price increases are inevitable, so purchasing activities have increased.  Production levels remain very healthy and it is reported that finished product inventories remain low.

In the North American market, the operating rates are very high at the 100% level due to strong demand from the fiberfill and the non-woven sector.  Further finished goods inventories are declining, which shows that demand pull is considerable.  Even though the staple imports have declined by 30-40%, however, it appears that with finished goods inventories decreasing, imports could go up.  It is worth noting that polyester staple prices have gone up consecutively over the last 7 months, and February experienced a 7-8 cents increase and March is in the region of 8 cents.  This is unprecedented, and current circumstances dictates that prices should further go up. For West Europe, the downstream demand is a little variable, with good demand in non-woven’s but average for hygiene business as well as automobile sector.  However, with a limitation on the supply of PTA, the supply and demand fundamentals are pushing up the prices gradually.  Further raw material pricing is somewhat steady with PTA strong but MEG a bit lackluster, thus ensuring a stable composite cost.  

POLYESTER FILAMENT (DOWNSTREAM)

Although the Chinese government increased interest rates by 25 basis points, this has had a limited impact on stock and futures stock market.  Most are of the opinion that price increase of polyester in the short term future is inevitable, in face of increasing raw material costs, substitution of cotton and increased capacity of fibre sector as consumer spending which is allowing the demand to remain strong.  This has been manifested in increase of POY, DTY filament yarn prices in the domestic markets as producers remain resolute to maintain their margins.  The domestic demand in Taiwan and India remained good.  With the Taiwanese NT$ having appreciated 7% during the last year, there is an adverse pressure on exports, but the domestic supply chain is balanced enough at a time when seasonal demand picks up to absorb this diversion of product from exports.  Similarly Indian polyester sector is expected to grow by 15% and there is an increased demand from non-apparel sectors such as home furnishings and technical textiles.  With operating rates in the low 90%, demand seems quite reasonable. 

In the North American sectors plant utilization rates for BCF producers was 100% as retail off take remained strong.  Polyester BCF shipments  in the US increased by 36% over 2009, which is indicative of market share gain of polyester over PP, Nylon staple and filament.  Also there is a downstream demand in the auto sector, and with importers switching to local suppliers the apparel sector demand has also picked up from the Central American and Mexico region.  Further demand for high tenacity yarns also remains quite healthy.  The demand for filament in the West European economies also remains stable, with an uptick in demand for the apparel and auto sector.  The general notion of cotton price hike, along with increase of polyester remains a concern for both textile importers and exporter, which set the tone of discussion at the recent Heimtextile Exhibition at Frankfurt.  

MEG (UPSTREAM)

The ACP for March came out to $1350 for Shell (up $120/ton), $1380 for MEGlobal (up $160) and $1400 from SABIC (up $ 170).  Due to moderate downstream demand such a price hike is difficult to absorb, as demand for antifreeze is low.  In Europe, two opposing factors are working.  Shutdowns at Ineos, turnaround at Clariant and a shutdown at a small facility at BASF has reduced output, thus restricting supply, at the same time the market demand has withered due to low PET manufacturing output, due to shortage of PTA, and demand further impacted as antifreeze consumption, due to seasonality issue, is impaired.  However, this slackness can be followed by market tightness as numerous turnarounds are expected in the Saudi Arabian market, with the longer outages coming from April to June.  Also EO remains very balanced, with no excess of this feedstock in the market.  So from a supply chain perspective, things could tighten in the impending future. 

Capacity utilization in India has increased to 90% for PSF and PFY, which is an indication that prices are being translated downwards.  Further the demand for polyester in non-apparel sector, home furnishing and technical textiles is increasing and it is expected that the polyester sector would grow 10-15% when the GDP is expected to grow by 8.8% for the current fiscal year.  Similarly in the North East Asian economies a greater % of spot is being factored into the contract pricing, which gives an indication of a lively demand.  The operating rates in China are similar to those as the pre-lunar year time as there is reasonable downstream demand.  There is a general notion that MEG may remain short, given that polyester is set to grow at a pace higher than MEG expansions.  Similarly, with 42% of consumption of Chinese monoethylene glycol (MEG), being exported out of Saudi Arabia, which is expecting 9 shutdowns out of their 11 facilities, price hike in the domestic Chinese market seems inevitable in Q2.  

PTA (UPSTREAM)

The supply chain in North America is not overly tight, but with PTA force majeures of Lotte in Europe and BP recovering to normalcy after prolonged outage, pressure would be released with limited outflow of PTA from the North American market.  Currently their downstream demand remains reasonably strong, as trade with Mexico has picked up.   In Europe a barrage of outages brought about due to technical reasons has severely limited PTA and thus the availability of PET in Europe.  BP has recovered but Lotte and PKN Orlen are down.  Further buyers of PTA found little relief from Asia, as there has been a strong demand for Korean PTA from India as well.  Another problem under focus remains at BP’s Hull Acetic Acid facility, which is very important for the supply of PTA.  If the Acetic Acid problem persists then there is a chance that it would impact availability in Q2 as well.  So, for realistic reasons, there should be a price hike possibility in Europe although the North American is less tight as being it may appear. 

Two factors are contributing to a tight PTA scenario.  The downstream demand has not really picked up after the Chinese lunar year holidays.  Sales to output ratio’s still remain low for PET.  However, due to some output issues at Mistsubishi’s plant at Haldia, and three expected shutdowns in china (Xianglu Petrochemicals, FCFC Ningbo, Zhejiang Yandong) the future outlook indicates to a tight PTA situation.  Two macro factors also point to rising demand, which are continued GDP growth of China, that will fuel local consumption and cotton shortage which would increase the reliance on polyester and thus impact positively its demand.  The challenge to be faced is that these price increases are not being passed very well downstream.  In fact many PET producers have started resisting such increases and some have even scheduled shutdowns under these circumstances.  It is felt that a price correction is expected in the value chain, as it is overestimated and investors try to cover impact of inflation.  In the short term, there could be a capping impact on PTA prices, but as soon as textile demand returns, the prices would start going up.  Governmental intervention may be in the offing.  

PARAXYLENE (PX (UP STREAM))

The settlement of NA Paraxylene (PX) for February was at 82 cents up 12 cents over January.  Asian increase was at 10.89 cents.  An 82 cents settlement is highest since the price collapse at 79.75 cents/lb set in July 2008.  The question to be asked, right now is, whether this is justifiable?  With outages at Exxon Mobils Beaumont facility and BP’s short Texas city outage, supply has not become unnecessarily tight, even though sentiments of market tightness remain amidst turnarounds expected in the market.  It appears that too much weight is being given to a tight market sentiment when neither PTA production nor PET productions are being curtailed due to a shortage of PX.  Given the current downstream demand an 80% operating rate for polyester converters is not providing the demand pull to create a shortage.  However, sentiments appear to be ruling the market.  The right perspective as one producer said, is that paraxylene is being produced to whatever prices are supporting.  At the same time with Asian PX at $1665-1675 the arbitrage window can open, and some traders are already in the process of booking cargoes to North America.   Further the paraxylene price increase is not supported by a cost push mechanism, as mixed xylene prices have not increased in conjunction with PX increases, and compared to January’s spread of $592, February’s spread has increased to $801. 

European settlement for February was almost at parity with Asia.  There is no real Paraxylene shortage in this region even with Israel’s Gadiv still not operational and PKN Orlen PX plant at Plock Poland having start up issues.  Why because the downstream demand has been curtailed due to PTA outages.  However, another factor contributing to a lower operating rate of paraxylene is low refinery output limiting aromatics availability.  With consumers reverting to substitutes, demand for naptha is being lowered and the spread of PX over naptha has increased to $700/ton.  With such a spread, logically crude oil prices are not directly impacting paraxlyene prices but there is a sentimental drive affecting their prices.  However, in the Eastern economies, specifically China, the high GDP growth rate, and with wages on the increase by 20-30% YOY, there is a continued demand for textiles and polyester expected in the future.  PTA operating rates have been becoming tighter and could go beyond 95% during Q2.  However, as we talk the output to sales ratio is quite low at around 50%, which is in stark contrast to what was happening prior to the lunar year break.  Further refinery operations still remain low.

So what do the market fundamentals indicate?  Currently due to moderate Polyester consumption, the downstream demand pull for Paraxylene is low.  At the same time refinery output reductions are mitigating this effect and keeping PX supply snug, if not tight.  Cost push from oil increase are not the primarily affecting the cost structure as consumers switch to substitutes like LPG.  PTA demand will increase as the year develops.  So Paraxylene should remain steady in the short run.  This should be followed by a steady increase of PX as demand for PTA starts going up.