FocusMEG spikes pressure China polyester makers

27 August 2007 02:59  [Source: ICIS news]

By Salmon Aidan Lee

SINGAPORE (ICIS news)--Chinese polyester producers expect operations and margins to be affected by the tight supply of monoethylene glycol (MEG) in the next two months due to outages in Saudi Arabia, industry sources said recently

However, they do not any significant drop in operating rates in September or October, they said.

Supply from Saudi Arabia is expected to be curtailed in the next few months, after oxygen-related problems forced the shutdown of several MEG units in Al Jubail along the Persian Gulf coast of the kingdom.

Five MEG units at Al Jubail, with a total nameplate capacity of 2.67m tonnes/year were either down or operating at reduced rates consequently.

Saudi major SABIC owns two of the units wholly, while a Japanese consortium led by Mitsubishi Chemical and Mitsubishi Corp is the joint venture partner with SABIC for the other three lines.

“The original fear was that if the MEG outage was so serious, we could end up with no feedstock to continue with production,” said an official from Zhejiang Longda, a mid-sized polyester producer based in Xiaoshan, Zhejiang province.

But this fear had largely been ruled out, said a trader with Jiangsu Guangsu, an active MEG trader based in Zhangjiagang, also in eastern China.

“Now, at least [SABIC] had told some of its customers that it would try to supply the contract volumes and we roughly can guess that the shortfall for September would be marginal and that for October would be around 40,000 tonnes only,” he said.

Another trader with Mitsubishi Corp said that although the shortfall, although serious, would not warrant the shutting down of polyester plants.

Instead, the impact would be more on prices, which shot up from $970-980/tonne CFR China in early August, to $1,090/tonne by 17 August and breached an 11-year high last Friday at $1,255/tonne.

“All this came as a surprise to us, but we’ve accepted that this will be a difficult time for us,” said a senior official with Zhejiang Yuan Dong, a leading polyester producer based in Shaoxing, Zhejiang.

“Prices won’t be low at least for a few months, but we’ll still make it through.”

Based on prevailing prices of polyester products such as partially oriented yarn and staple fibre, margins have remained fairly comfortable for makers, after taking into account feedstock costs between mid-July and mid-August.

For example, partially oriented yarn of 150 denier/48 filament priced at yuan (CNY) 12,400/tonne ex-works enjoyed a margin of almost CNY1,200/tonne last week.

Even with MEG prices rising in the past two weeks, polyester makers still expect to maintain a margin of at least CNY200-300/tonne in September. This is because the price of main feedstock, purified terephthalic acid (PTA), had been lacklustre on the back of overcapacity.

Last Friday, purified terephthalic acid (PTA) prices slipped about $20/tonne to $880-895/tonne CFR China, and look set to fall even further due to the oversupply and tumbling upstream prices, most notably paraxylene (PX).

“As long as we can push the prices of our products higher in September, I think we can make ends meet,” said an official with Xiang Sheng Group, a mid-sized polyester producer based in Xiaoshan.

Chances are high that polyester makers might succeed, as September is traditionally the seasonal peak for the polyester and textile industries in China, ahead of the retail boom later in the year.

“Since they’re likely to get their MEG, and since filament yarn and fibre makers can still make money, it’s very unlikely they would reduce operating rates,” said a trader with Zhejiang Grand, a company which specialises in opening of letters of credit for the feedstock procurements of many polyester companies in eastern China.

The exceptions are the chip producers, said an official with Zhejiang Lianda, another mid-sized polyester producer in Xiaoshan, who said that operating rates among several makers of fibre chips had fallen slightly since last week.

The margins for chip makers were not so high to begin with, so with feedstock costs rising so much, they would rather cut back on operating rates, he added.

However, market observers agreed that the cutbacks would still be the exception rather than the norm.

“I think some of the most speculative polyester producers themselves might just be looking to sell a little bit of their MEG inventories, as it pays more doing so than selling their own products,” said a Shanghai trader with Teracle International.

“After prices of MEG moderate and after the prices of their own products rise, they would return to operating their plants,” the trader said.

By: Salmon Aidan Lee
+65 6780 4359

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly