OUTLOOK '08: Asia polyester to consolidate

31 December 2007 03:30  [Source: ICIS news]

By Hong Chou Hui

SINGAPORE (ICIS news)--The polyester industry in Asia is headed for a year of consolidation in 2008 and prices are expected to firm in the first quarter on the back of feedstock costs and crude futures, sayproducers and traders.

Feedstock monoethylene glycol (MEG) surged to a record high spot price of $1,690/tonne (€1,149/tonne) CFR (cost and freight) China Main Port (CMP) in mid-November on tight supply triggered by production problems plaguing MEG producers.

Coupled with crude futures which hit an all-time high of $99/bbl on bullish sentiment and a weakening dollar, the polyethylene terephthalate (PET) chip and downstream polyester fibres and yarn sectors have gained in tandem with feedstock prices over the last quarter of 2007.

The MEG shortage is expected to be resolved by the first quarter, when MEG major Saudi Basic Industries Corp (SABIC) resumes full production while a possible cut in US interest rates in January may trigger off another run at the psychologically significant $100/bbl mark by crude oil traders.

All this could result in corresponding gains for the polyester industry as PET chip and polyester fibres and yarn producers would seek price increases to protect their margins.

Market sources, however, warned of a bumpy road ahead for polyester producers after successive months of price gains in November and December.

“Consumers are reluctant to accept any more price increases because the inflation throughout Asia in 2007 simply hasn’t been matched by wage growth,” said a Taiwanese trader in Mandarin.

“The effect is making itself felt with garment manufacturers facing lower sales while PET bottle chip end-users making bottled drinks can’t pass their costs on to their consumers."

He added that weather anomalies such as a warmer winter in southern China have resulted in poorer demand for cold weather items such as comforters and jackets.

The Chinese government raised the cash reserve requirement ratio for China’s commercial banks by 1 percentage point to 14.5%, making it the 10th such successive hike on 8 December. This measure was undertaken to reduce excessive liquidity in the market to prevent the economy from overheating.

This has led to a credit crunch in China, with companies having to resort to cash to settle deals as the bar for obtaining credit had been raised.

As a result, some Chinese PET chip and downstream polyester fibres and yarn makers resorted to fire sales to raise hard currency and liquidate excess inventory, a move that earned the ire of non-Chinese polyester sellers this year.

“We need to protect our margins because this is the peak season and sales will taper off by mid-January next year. It’s no wonder we’re having problems selling because the Chinese are moving in the opposite direction when everyone else is hiking their prices,” said a South Korean PET bottle chip producer.

Asian polyester majors Indorama and Reliance have added to their production capacities with purchases of assets in Europe and Malaysia respectively.

With the possibility of a recession looming over the US in 2008 on the back of the subprime crisis, market watchers have highlighted the possibility of polyester products earmarked for export to the US channelled back to Asia by Indorama and Reliance.

This could trigger a collapse in prices of PET chips and polyester fibres and yarns.

PET bottle chips are used to manufacture bottles for consumer goods such as drinking water and cooking oil. Other major PET producers in Asia include Far Eastern Textile, SK Chemicals and KP Chemical.

Polyester fibres are used as filling for comforters and winter jackets while polyester yarns are utilised to make clothes.

Major producers of polyester fibres and yarns include South Korea’s Huvis, India’s Reliance Industries Limited and China’s Sinopec Yizheng Chemical Fibre Co.

($1 = €0.68)

By: Hong Chou Hui
+65 6780 4359

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