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. 

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.