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.