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.

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.