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.