CONCLUSION: SHORT, MEDIUM & LONG TERM POLYESTER PRICING FORECAST

Basic understandings of the international economic fundamentals show a certain trend that would impact the polyester sector globally.  In stark comparison to East Asia, for Western economies, particularly United States, economic fundamentals are not robust.  The joblessness rate in the US has again gone up to 10%, which shows huge challenges yet to be overcome.  On the other side, eastern markets are tightening monetary policy, not to let these economies overheat.  India, South Korea, Thailand have notched up interest rates, and the Chinese government increased the reserve ratio requirements, thus tightening flow of money in the market.  This has a direct bearing on business output and consumption.  The major buyers of crude oil are the emerging markets of the East.  So with curbs on buying, with restrictive policies in place and amidst a wavering US$, in the short run there would be a capping affect on crude oil prices.  Further with OPECS willingness to curtail oil in the region of $75-85, there is a favorable chance that oil may not even reach the psychological level of $100/barel.  In fact a reversal in the oil rates going forward is also a possibility.  What does this mean for the polyester sector?  With the downstream demand not robust in the western economies, the juggernaut on paraxylene may loosen.  Factors attributable to this are simple, the inherent structural weakness in the demand cycle of paraxylene, with an arbitrage window for mixed xylenes, and the slow down of the eastern economies, brought through governmental intervention.  On the monoethylene glycol side of the sector, the downstream demand is strong, and prices are expected to stay strong.  Again the reasons delineating this are high demand of anti-freeze during the winters, and a shortage of Ethylene Glycol (EO) in the market, making the supply of MEG tight. 

So in the short term PTA looking strong based on a formula PX, and MEG supply tight, what holds for the PET sector in the immediate future and the near future?

This blog does not profess its predictions to be as insightful as those of nostradamus, but we are going be bold.  Downstream users have already set the pace of short term demand, by pre-buying, with limited success in transferring these prices further downstream.  But what is the outlook for the medium term; the fallout of 2011 Q1?  Amongst the above variables already discussed another variable to contend with would be the Chinese lunar year, commencing on February 3^rd; so pre-buying will give the PET producers enough room to price high, as the stocking up continues as this event nears.  This would mean that downstream demand will remain robust in the short term.  But, upon completion of this event, and with the Chinese market emerging from its slumber, there would be a momentary slow down, and there would be a time lag before market reverts to normality.  Prices should drop, and European converters would be quick to follow suit.  So February could be slow for Eastern as well as parts of Western polyester sector.  The North American market would be affected later, during March, as raw material settlements for Asia are finalized, while they would try to maintain the windfall opportunity through better crude prices, tight MEG and lower threat of arbitrage, as the Far Eastern market recovers from the holidays. 

In the long run, the contractionary , macroeconomic variables, set by the Eastern economies will dent the chances of price bubbles that we are experiencing right now, where as the expansionary macroeonomic set by the Obama administration are yet to yield the required results of renewed demand in the North American economy.  Europe also remains lackluster. 

PET PACKAGING RESIN (DOWNSTREAM)

Looking at the North American market dynamics, converters are holding their purchases.  This may be due to either a sluggish demand finally setting in as the low season is well underway; secondly there is an apprehension among buyers on how the market may hold up in the coming future in terms of pricing.  With the demand for antifreeze high, a tight supply position is helping the MEG prices; however, as explained earlier, there is an inherent weakness in the PX side of the supply chain, as there is an arbitrage for mixed xylenes to Europe.  So the downstream demand dynamics are topsy-turvy and may put to a halt this grinding cost pressure.  The next couple of weeks will define the impact of demand.  Light-weighting continues to depress demand of PET, and the demand for food containers is a high growth sector.  But even this sector uses wide spec material which has a lower price than prime grade.  So the cost fundamentals may be weakened as the demand function is set to lose it robustness.  Price is the west European sector is stable, with producers looking for a Euro 70/ton increase.  However, amidst this increase in raw material costs, PET producers seem resolute to incorporate the cost impact of raws  into their pricing, and with Asian import at par with European producers or higher, there is a very good chance that prices would increase to Euro 1300 + levels.  However, looking ahead in the near future, many speculate that spot pricing would reduce as an aftermath to the Chinese lunar year, which would induce a downward cost pressure on PET. This reduction should be momentary at the most, as Chinese market reverts to normality after this break which does stretch quite long.  Even the far eastern bottling sector is seasonally sluggish.  Plant operating rates are in the vicinity of 60-70%, and converters are of the view that prices would fall in the coming days, so they are not building stock.  Most far eastern economies have reduced competitiveness for bottle grade polyester resin exports, and in contrast to EU and Russia, the demand from South America is picking up as that region enters a peak season. 

Conclusion: The downstream demand dynamics are topsy-turvy and may put to a halt this grinding cost pressure.  The next couple of weeks will define the impact of demand. 

POLYESTER STAPLE (DOWNSTREAM)

Demand for polyester staple is at strong levels as cotton substitution is taking place.  Despite the strong overall market, customers are cautious and are buying in small quantities.  The two opposing factors that may be leading to their hesitation is the slackness in demand as the lunar year approaches and with the passing of Christmas, but the diametrically opposing factor is the price of cotton is much higher than that of polyester staple.  Cotton prices are approximately 13000 RMB higher than polyester pricing in the Chinese market and spun yarn (PC) Euro 2.55 – 3.55 per kg, depending on the count as compared to filament & polyester spun yarn, which is in the range of Euro 1.45-1.55/kg.  So while one force may lead to demand slackness, given that not all sectors are doing equally well, the price disparity may work in a way so that the price differential between cotton and polyester narrows to a practical level.  However, cotton prices don’t appear to point downwards during Q1 of 2011, as a shortage in world output is expected to remain till the middle of 2011; before the yearend demand changes other market dynamics which may favor the retention of market prices prevalent at that time.   So with our discussion on raw materials, the cost push is apparent in reducing competitiveness of Asian produced goods.  NA domestic suppliers are reporting that traditional importers are coming to them for supply, as they are not getting competitively priced products from overseas.  So this would again support the internal domestic supply chain dynamics, causing a demand pull.  Not all sectors are performing equally well.  Demand for weavers and knitters is very good, as the main cotton substitution is occurring here.  Fiberfill business is reasonable due to the import substitution impact, and nonwovens are slower due to seasonal factors.  Similarly in the EU region hygiene nonwovens and wipes demand is on a seasonal decline, while the demand from automotive sector remains strong supported by good export.  Fiberfill consumption has increased for the apparel and medical sector, but home furnishing demand remains low. 

What is gathered from the above discussion is that demand is variable.  Raw materials can only be priced at a level, what consumers are willing to pay for them, through the value chain. Is the demand robust enough to sustain such robust raw prices? Definitely this may be the case in the short term.  2011 Q1 will be interesting to watch. 

Conclusion: Raw material disparity between cotton and polyester, may ensure the continuation of polyester demand, thus ensuring pressure on raw materials costs and thus polyester. 

POLYESTER FILAMENT (DOWNSTREAM)

The initial worry was that the inventories were building up as December started, due to seasonal low demand and difficulties were being encountered in passing the prices downstream.  This change is evidenced by the fact that sales-to-output ratio increased by 50% during the start of December, and now are over 100%.  Therefore, the rising inventories are becoming streamlined with good off take.  This demand is up with the onset of the Chinese lunar year.  Currently, with good downstream demand, planned expansions in china are 2 million MT’s in 2011.  In the Taiwanese market, the downstream demand for filament has been good particularly for 75den DTY as there is a preference for lighter weight polyester fabric.  However, exports are low, due to a strong currency, but domestic demand remains strong. 

On the whole the western markets have had a strong demand for high tenacity filaments being used for industrial applications, particularly the automotive sector, as well as the apparel sector, where it is being seen as a substitute of high priced cotton.  The overall strength in the market is seen by the fact that a 9cent/lb price increase was settled without any issue.  Similar demand trend has been witnessed for the European market.  The price has remained stable and strong, given that there has been a lower influx of imports, as Asia tries to fulfill its domestic demand.  Again the automotive sector remains a sector with high demand, but home furnishings sector remains at a poor level.  The same is the case for BCF (Bulk Continuous Filament) as carpet business is very soft in the North American market.  Upholstery sector for both Europe and North America remains relatively soft. 

The downstream dynamics for this particular product line are portraying a variable position of the market, some sectors performing better than others.  What needs to be monitored is whether the cotton bubble will burst, and whether we would see a downward revision of the price of this commodity during 2011, thus reducing its juggernaut on polyester intermediate.  

Conclusion:  Downstream demand is variable, and not all sectors are performing equally well. 

MEG (UPSTREAM)

Both long term and short term indicators show that Monoethyleneglycol (MEG) prices will remain firm as we head into 2011.  With US spot price near 47 cents/lb (~1040 $/ton), there have been inquiries from Europe and China.  However, the devaluation of the Euro has limited the import potential for that destination.  With three major shut downs, and 6 shorter outages, in the pipeline, Saudi Arabian capability potential remains doubtful in the medium term.   Further there is some uncertainty on the availability of Ethylene Oxide, EO, a feedstock for MEG.  Also the imposition of sanction on Iranian MEG, will increase the tightness of MEG in the European market.  So these few factors indicate that MEG supply will be limited as we head into 2011.  Further for the Far East, there are just a handful of plants coming up in comparison to polyester filament and PET plants.  This overall feel for the market is emphasized by the fact that many buyers have confirmed that discounts negotiations were smaller as we head into 2011 compared to 2010.  At the same time, offsetting factors of an impending increase in demand could be Chinese economic policy, cotton futures & rate of global economic recovery.  Subsequently the short term demand is also consistent with the long term.  Asian MEG prices are pushing up right now, with a range of $1075-1090.  Sales to output ratio of yarn plants have increased to 50-80% from the recent past to 100-120%, which suggests a depleting inventory position.  There is information of further hikes to the region of 200%, and inventory levels of yarn are just below 20 days.  Such spikes in the downstream demand give rise to market speculation, as some traders are also offering at $1090/ton level.  However, will such prices be possible, given that the big three MEGlobal, Shell & Sabic settle at a strong, but a realistically sustainable rate of $1150 contract price, which is $50-100 over Asian spot prices and down from their November numbers.   

CONCLUSION: The limited supply of feedstock Ethylene oxide (EO) and outages of monoethylene glycol (MEG) will ensure a robust price of MEG. 

PTA (UPSTREAM)

Due to the structural weakness in the North American (NA) Paraxylene (PX) market, some NA producers are hoping for a settlement higher than 2.5 cents of Asia, but this may be overly optimistic.  Factors of reduced import, which is translating into higher domestic operations rate, and the Christmas holiday period are keeping the prices up, even though the year end reduction in demand is beginning to show.  Another factor to be kept in mind during January is how prices behave as the Chinese Lunar year, at the beginning of February, starts nearing.  So while the slackness in local demand may start weighing heavily during January, an interest in setting notional prices with East Asia/Far East would remain, which again could artificially keep up the prices up not only in the US but also Europe.  The reasons favoring high PTA prices in Europe are a strong pricing of polyester intermediates, high PTA demand from Russia and a good downstream demand.  And with low inventories of polyester, PET, as Q1 approaches, demand of PTA and PET is expected to remain healthy in the near futures.  Keeping the above factors in mind the cost push down the supply chain has not been typically hard.

The western pricing dynamics are largely influenced by what is happening in the East Asian and typically the Far Eastern market.  This applies to the complete value chain.  In the South Korean market not only there is a strong demand for polyester staple fiber, PSF, but also the demand for polyester filament is very strong, with operating rates of 80-85% being achieved.  PSF operating rates are higher at 95%.  This has translated into overall extremely high operating rates of 95-100% for PTA.  Further many new capacities in the Chinese market are expected to come online during the middle of 2011.  2000kpta Zhejiang Yisheng in Nigbo is expected to start during July 2011.  Another 600 ktpa plant of Sanfangxiang Group is planned to come on-stream by the middle of 2011.  So the demand pull on PTA is expected to remain well into 2011. 

Some economic factors to be reviewed that could act as a detriment to the feedstock profit margins & pricing could be the value of crude oil exceeding $100/bbl which would make a pass through the chain very tedious,  or what would be the Chinese governments midterm monitory policy and how could the industrial activity be affected by high interest rates.  Could we see a devaluation of cotton, thus lowering the price of PSF, and thus depressing the value chain prices?  These factors are some to be followed as we head into 2011. 

CONCLUSION: While the slackness in local demand may start weighing heavily during January, an interest in setting notional prices with East Asia/Far East would remain, which again could artificially keep up the prices up not only in the US but also Europe.

PARAXYLENE (PX (UP STREAM))

PX (UP STREAM)

The price of NA PX is artificially high as there is low demand for its precursor, mixed xylene, in the US market.  Lack of demand has a deflating impact on PX; however, trying to set parity with Asia, where PX prices have assumed an upward trend, December contract nominations for NA PX have been higher than November.  Therefore, the price gap between NA PX and NA MX has opened up, and had it not been a steady demand for downstream sector, PX price may have collapsed as such a gap is not sustainable.  What appears now is that an arbitrage window will open up for the NA MX market as cargoes start moving towards Asia, where prices have been maintained at $1030-$1040 as compared to $945.  As of now some cargo is already booked for Asia and further negotiations underway.  What this means is that a downward cost pressure for NA PX is in the works, and with price being artificially maintained, a closure of the arbitrage window should bring stability.    

This is an apparent oddity, with intermediate demand for aromatics low, thus easing as cost push, but with NA PX going towards a high settlement.  Gross margin is expected to be ~ >$370-$400 much higher than the past average of ~$250 as PX producers, with little justification, look to settle upwards.  This upward cycle should start reversing as China lunar year approaches. 

Europe PX settlement, amidst, stable downstream demand, settled Euro 102/ton higher at Euro 1030 in December.  Comparing to an increase of $55 of Asian raws over November, however a weak Euro: Dollar parity, down from 1.41 to 1.30, such an increase is really “unexplainable”.   However, it is being indicated that downstream demand for PET remains very healthy and with low PET stocks in the value chain, a need to purchase will induce PTA and thus PX demand going into 2011. 

In the Asian market, the situation is different.  There is no slackness in the entire value chain and the increase in feedstock prices are finally factoring into PX spot prices.  With a bullish sentiment PX price has sporadically jumped to $1350/ton fob during December.  Temporary factors of outages, amidst this buoyant polyester market, are making supply tight.  Kuwait Aromatics has announced a force majeure for PX in January.  Sinopec Yangzi is to shut its two 800ktpa PX plants for two weeks in second half of December.  Petrochina Urumuqi has shut down its 1000 ktpa PX plant which is expected to start in spring.  However, with the availability of Iranian material expected during Q1 of 2011, and then the start up of S-Oil in Korea of 900 ktpa which will be followed by Urumuchi in China in Q2, would increase the supply of PX, however, this should match the expected 6-7% growth of the polyester sector.  So by all means an oversupply in not expected.  In the short run, with the coming of the Lunar New Year Holidays, some stock building should be a precursor, to the sluggish start expected afterwards.

CONCLUSION: If global cost dynamics are to be settled keeping far eastern raw materials in perspective then our cost of paraxylene and consequently PTA (purified terepthalic acid) will ride up.  

STRUCTURE OF LEARNING

The blog is structured in a way so that it can take aboard, new comers as well as  informed audience, and apprise them with current market situation.  To cater for both classes, we initially jump right into business discussion as it relates to the market, while always keeping in mind the main objective of this blog; ascertaining short term and long term demand and pricing trends.  However, during the course of our discussions, we may delineate a course outline as well.  This will serve the professional, in better analyzing the structure of the value chain, and also defined metric for basing pricing decisions.  We will incorporate this outline during the course of our discussions. 

Acronyms are used often in the business discussion, therefore, some to be kept in mind for better comprehension of the value chain are as follows:

ACP                Asian Contract Price

NAC                North American Contract Price

EUC                European Contract Price

NA                  North America

EU                   Europe

MEG                Mono Ethylene Glycol

MX                  Mixed Xylenene

PX                   Paraxylene

PTA                 Purified Terepthalic acid

PET                 Polyethyleneterepthalate

OR                   Operating Rates

FC                   Fixed Cost

VC                   Variable Cost

POY                Partially oriented yarn

FDY                Fully Drawn Yarn

DTY                Drawn Texturized yarn

PSF                 Polyester Staple Fiber

Ktpa                Kilo Tons Per annum

DEN                Denier

dTEX               decitex

BCF                 Bulk Continuous Filament

PC                   Polyester Cotton

CT                   Cotton

VALUE CHAIN

In the simplest of terms, it would be good to make note of the fact, that plastics i.e., PET, PVC, PP etc have an origin from crude oil.  On one side of the refinery operations Napthalene is produced via hydrocracking from a wide range of refinery feedstocks.  Next a BTX (Benzene, Toulene, Xylene) extractor, which is also an aromatic complex, convert naphtha, from a variety of sources, and pyrolysis gasoline into the basic petrochemical intermediates: benzene, toluene, and xylenes. Conventional PX technology is based on the isomerisation of mixed xylenes. High purity product can be obtained using crystallisation or selective adsorptive separation.  Next PTA is produced by the catalytic liquid phase oxidation of paraxylene in acetic acid, in the presence of air.  On the other side of the refinery operations most ethylene used for petrochemical applications is produced by steam cracking of naphtha or natural gas liquids. 

From the above stated information, technical jargon as it may appear to many readers, what needs to be understood from a commercial standpoint is which operations are predecessor to whom.  It is this value chain, which defines the supply slackness and tightness at any given point in time, which again impacts two variables; supply/demand, and pricing orientation. 

OUTCOMES

So two learning’s that I would want the readers to take away from this discussion are

1. Understanding the acronyms
2. A reasonable understanding of the manufacturing value chain to better understand the supply chain.

FOREWORD

A couple of professional reasons have prompted me to start this blog.  Ever since I stepped into the PET (Polyethylene terephthalate) market, one of the most relevant point of discussion for all professionals that I come in contact with is understanding the correct behavior of the market, and specifically how that relates to future pricing trends.  What I have seen is a lack of convergence of point of views when a price of a contract has to be figured out.  With its origin from the crude oil, it would not be wrong to say that this sector has its fair share of complexities, even though the delivered product may just be a polyester fiber or a chip.  Further the application of this product in the textile sector, food and packaging industry are enormous.  The common eye may overlook its importance, but professionals of this sector truly understand its pervasive scope as a globally traded commodity. 

So if I were to sum it up, some of the factors that have motivated me to start this blog are as follows:

1. A firm understanding of the polyester market fundamentals
2. What factors to be considered while predicting the future market  pricing trend and assessing demand?
3. To educate audience on how the whole sector is structured
4. To understand better the dynamics of the supply chain i.e. from crude oil to the production of polyester
5. To deliver market updates related to acquisitions, plant expansions, technological advancements and market developments. 

My approach of building up this knowledge base for the viewers is first providing an over view of the value chain, without delving into the technical complexities.  Also I would like to state the acronyms that are commonly used, so that the audience remains aware when they are applied.  So after having given the basic over view, I would start talking of the fundamental components that affect the downstream polyester sector.  The paradigm over which this blog is being synthesized, is that all readers, novice or advanced should be able to attain knowledge from these articles, that would help in knowledge propagation.   

In short, specifically we would be regularly analyzing the prevalent market scenario of this sector.  Broadly we would be touching upon factors related to global economy, international fiancé, international trade & marketing and their implication on this sector. 

A CHANGING MOMENT

Dear Readers,

For me, this day January 1st, 2011, may be considered a vital and one of great significance.  Why the over dramatics, not because today I’m setting the corner stones of starting my first blog, but most importantly, I'm taking a step whereby I will open to the world a channel of communication and a knowledge base.  Blogging will be a medium that will allow me to interact and develop a road map for an intellectual journey. 

The reason for taking “The Polyester Value Chain” as my starting blog is simple:  it is most relevant to my current field of profession.  Further this sector in its totality influences, our every day life, in ways in which consumers perceive not.  In fact the average consumer is regularly making decisions to purchase products containing polyester.  The reason for subscribing to this topic is its relevance in our every day lifestyle, and to open to readers the Global macroeconomic fundamentals governing the dynamics of this sector.  It’s about creating the connection between market indicators and chain operations to the perceptions of the common man and thus his purchasing decision.  This blog will also lend support for all professionals working in the polyester sector who are regularly making purchase and sales decisions as part of their job function. 

I draw the attention of an audience, which wants to see global economics, international finance, cost economies, their interplay and practical application in the sector of the “The Polyester Value Chain.”

So readers are we ready to start this journey?!!!!

Regards,

Polyester Guru