24 March 2003 00:00 [Source: ICB]Many in the petrochemicals and fibres industries across the world will be aware that a number of increases in the prices of fibre raw materials are taking place. Some are supported by supply tightness, such as MEG, and many because of rising oil-influenced feedstocks like benzene, paraxylene (PX), ethylene and propylene.
With regard to these latter, it is possible that the geopolitical pressures forcing up the price of oil may ease at some time during the first half of 2003, but no one is saying when. In the meantime, the costs of fibre production are rising significantly and fibre producers everywhere are seeking to pass such cost increases on down the textile pipeline.
The success of any price increases along the pipeline will of course depend on market circumstances. However, where raw material price increases can be passed all along the system, we estimate very broadly a relationship for the apparel business such that a 20% increase in the fibre price leads to a 1% increase at retail.
It is no secret, however, that the retail trade is not looking for any price increases; indeed the reverse. For some time, leading retailers such as Wal-Mart have been on a campaign to drive cost out of the textile system. This is supported in part by overcapacity in fibres, textiles and garment-making, and also by a shift of capacity to low-cost regions.
We thus see a conflict between cost increases taking place upstream and price decreases taking place downstream, with the fibres and textiles industries sitting in the middle trying to live with both pressures. With at least one fibre intermediate, however - MEG - the oil price is not the main reason for price increases.
This year, although barely started, is already living up to PCI's forecasts for MEG to experience one of its tightest markets ever. The permanent loss of BASF's capacity in the US, on top of a year-long outage at Dow Chemical's plant at Taft, Louisiana, has already put MEG supply at very low levels.
Margins in MEG for some while have been at historical low levels for most producers, except those in the Middle East, and North American margins have also been hammered over the past three years because of a volatile market for natural gas. Even with Nan Ya in Taiwan due to start its new plant in the fourth quarter, there is still only enough global capacity to make an additional 800 000 tonne/year this year.
Only substantially weaker demand in Asia would therefore stave off a very tight market, and there are no signs that this is likely to happen. Some polyester producers in China are already experiencing tightness, and may be unable to run their plants at the required rate. Conditions will be even tighter in 2004, awaiting new capacity at the end of that year.
This lack of raw material, and consequent denial of polyester supply, could carry far more weight downstream with the retailer than any cost-related increase along the textile system on its own.
Considering the other side of polyester's feedstocks, PX markets globally have responded to a rapid tightening in supply since November and a resultant spike in prices has also led to severe cost pressure on the downstream polyester industry. A series of planned maintenance shutdowns by US producers has occurred at the same time as PX production problems in Europe and Asia.
The situation has been exacerbated by a tight market for purified terephthalic acid (PTA) in China and several major PTA startups that have added to the demand for PX, drawing down inventories. The resultant price hike for PX in Asia has translated to higher domestic PX prices in North America, and consequently sharply higher PTA and dimethyl terephthalate prices, which downstream players are struggling to pass on.
High crude oil prices and strong mixed xylene values have also lifted the cost floor of polyester intermediates, but it is still market factors that have been of most significance for prices, especially if we look beyond events in the Middle East.
With few new PX plants due onstream in the next few years, generally tighter PX can be expected, especially with the mid-year start-up of Interquisa Canada's new PTA plant; a plant that will also add greater competition within North American markets at the level of PTA.
The world acrylonitrile market is also subject to change during the year. The present situation is confused, however, by the enormous uncertainty over raw materials. PCI forecasts that acrylonitrile demand will be healthy this year, but we see an evolution of the supply side as new capacity emerges. This could strongly influence pricing, but a soft landing rather than any collapse is the most likely scenario. In the US, the timing of the restart of the Sterling Chemicals' plant is uncertain because of propylene supply.
In addition, there have been a number of turnarounds brought forward keeping the short-term balance snug. Until the raw material situation becomes clear and the timing of the restart of the Sterling plant is known, it is difficult to forecast acrylonitrile prices to any degree of accuracy.
The North American market for nylon intermediates is largely insulated from recent events in China - anti-dumping measures against certain imports of caprolactam - as it is not too involved in that market. That said, exports of caprolactam, adipic acid and hexamethylenediamine all increased significantly in 2002 compared with 2001.
The main issue within North America remains, therefore, how long feedstock pressures will continue and to what extent they can be passed through as higher polymer and fibre prices to the carpets industry before oil prices subside. Nowadays, the North American nylon fibres market is largely represented by carpets where market sentiment shows a distinct slowdown compared with last year.
For all forms of nylon fibres, 2003 in the US could even show production 2% below 2002, according to PCI's latest estimates. For nylon intermediates in North America, any buoyancy this year must come from improved demand in plastics rather than fibres.
Final demand in North America for products containing acrylic fibres continues to increase, but textile mill consumption for acrylic fibres continues to decrease. This is due to the continuing decline of the North American textile industry, which cannot compete at the commodity level against increasing imports of low-cost finished goods.
US fibre production in polyester fibres is estimated to have risen in 2002 by just 1.3%, to nearly 1.6m tonne. Textile filament leading the way with an increase of 4.6%. As with other fibre types, however, import attack is at every level and the prospects for 2003 suggest at best the same production figure as in 2002.
In such a situation, the fibre producers are having to work hard, but the difficulties they face are equally felt by their textile customers. Increases in acrylic, nylon and polyester fibres are being presented to the textile industry in North America on a 'take it or leave it' basis, but there are still many tough negotiations taking place.
Peter Driscoll is senior partner at PCI Consulting
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