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.