POLYESTER STAPLE FIBER -PSF (DOWNSTREAM-MAY/JUNE 2011)

The sales to output ratio currently is maintained above 100%, which shows steady, but by no means robust, downstream demand in the East Asian and Far East Asian regions.  Many market players were of the view that in order to maintain basic margins, amidst stringent Chinese government monitory controls, it may even be necessary to impose production cuts.  Inventory had increased to over 20 days, an industrial metric signaling caution.  Domestic prices remained on a downward trend in China falling to Rmb 28, 100 from Rmb 30,000/ton in April and this downward trend has continued ever since.  Dangers of overcapacity were announced when idle capacity at Xianglu (180 ktpa) and Luoyang (50ktpa) came online.  Cotton prices have also been of direct interest to PSF producers and some have remarked that the product substitution to polyester is slowing down, as cotton futures decline.  Due to not very favorable market conditions Nan Ya and Tainan were planning cuts in their staple fiber outputs.  Since the high season of textiles is nearing an end, the 2011 forecast of PSF does not appear too healthy in the Eastern economies. By contrast the sales of PSF in the North American market have remained reasonably strong, and substitution away from cotton to polyester still remains, particularly in the Mexican region.  Non-Woven’s and fiberfill businesses remain quite strong.  The major concern for many producers right now is the non-availability of PTA, brought about by the force majeure at BP's plant at Decatur as well as problems at the Cooper River, SC plant.  Producers have been able to work around the situation by using inventories and stalling orders, and now are hoping for an immediate resolution to the startup of the Decatur plant.  Currently these plants are in startup mode. 

A recent non-woven’s exhibitions in Switzerland, observers were convinced that PSF sector of the European economy had fully recovered from the recession and that there was good demand.  PSF During 2010 this stood at an estimated 900,000 MT's and is expected to rise.  Of this sector hygiene constitutes 37% of the total & wipes 16%.  Application of wipes is not only limited to personal hygiene but is extends to domestic duties, healthcare and industrial applications.  2011, Q1 has also witnessed an increase in the construction applications of non-woven’s, which includes roofing and constitutes 18% market share of non-woven’s.  Auto sector also continues to flourish given that there are more than 40 parts made from non-woven fabric. May prices were at Euro 2.15-2.20/kg, and there was a downward pressure on PET with low cost imports from Asian economies posing a threat, especially at a point in time when anti-dumping duties on some of these Asian nations is nearing an end.   MEG side of the component cost is on steady incline, due to global and regional shortages, which may lend support to the maintenance of PET prices even though lower cost imports do pose a threat.  The imports have the potential of countering any cost push price increase. 

FILAMENT YARN (DOWNSTREAM-MAY/JUNE 2011)

In the Far Eastern economies there is an expectation that feedstock price, specifically PTA, may decline further.  Therefore, downstream buyers have therefore held of their purchases and in some cases asking for discounted prices.  This is slowing down filament producers sales.  A multitude of reasons have  resulted in price reductions; power restrictions, restrictive monitory policy, international oil prices have reduced feedstock costs, but also raised speculation amongst buyers that prices would further reduce, which has further retarded sales.  2010 was a year of record profitability which resulted in the injection of 2 million tons of filament expansion for 2011.  Now this is being seen as a surplus in the short term leading to a bearish sentiment in this sector.  In Taiwan, there has been a steady build up of inventory to 20 days.  A stock of 15 days is considered a good indicator of downstream demand, which seems to be waning right now.  This has resulted in steady erosion of prices to NT$88-90/kg in May from NT$ 96-98/kg during April for DTY 75 den.  In light with the market scenario many producers are bringing forward their plant turnarounds.  Local and export volumes remain weak. 

In NA, the BCF business has steadily grown to over 25% compared to the same period last year.  However, a general weakness in the market is beginning to impact BCF sentiment.  Although there has been capacity enhancement, but producers feel that the overall market conditions should improve if BCF is to continue to grow as it has in the recent past.  Carpet producers continue to introduce different styles and differentiate product to enhance sales.  The automotive sector continues to perform strongly, but the shortage of PTA induced by force majeure of BP PTA, is a major cause of concern, casting doubt on availability.  This specifically at a time when the automakers are expecting to sell over 13 million pieces in 2011, which should provide enough momentum to downstream demand, and will help stabilize feedstock pricel. Even though apparel sales have remained steady, but knitters and woven fabric producers are being very prudent in holding onto stocks.  The home furnishing sector has remained calm, but the automotive sector continues to do well.  Texturizing rates have been quite good, and especially air jet texturizing for the automotive sector.  Internationally, due to declining feedstock prices, imported material has started to make its way into the market as both POY and textured yarn have become competitive with local production. 

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.