OUTLOOK '08: Asia PTA to fare better, PX worse

03 January 2008 02:56  [Source: ICIS news]

By Salmon Aidan Lee

SINGAPORE (ICIS news)--Purified terephthalic acid (PTA) makers’ weakening margins amid escalating feedstock costs and worsening oversupply may end in 2008 but paraxylene (PX) producers face a difficult year, buyers and sellers said on Thursday.

“The overcapacity in the PTA market is going to continue, but you can see that fewer new plants are starting up this year compared to 2006 and 2007,” said a PTA trader from Korea, who moves about 30,000 tonnes of material every month.

After the startup of BP Zhuhai’s mega-plant – with a nameplate capacity of 900,000 tonnes/year but can easily produce up to 1m tonnes/year – recently, only four new units with a combined capacity of 3.3m tonnes/year would startup.

Of the four, Jiangyin Hanbang Petrochemical’s 600,000 tonne/year unit in Jiangsu province may start up only in early 2009, while Formosa Chemical & Fiber Corp’s 400,000 tonne/year at Loong-der in Taiwan’s Ilan county would startup only after the first quarter.

Yisheng Petrochemical’s 1.5m tonne/year plant at Dalian in northern China could also startup in phases, bring onstream some 400,000-500,000 tonnes/year of new capacity first in the middle of 2008, before starting up the remaining capacity much later.

In contrast, 2007 saw a total of five lines starting up, adding more than 3m tonnes/year of new capacities.

Even the failure to start up by Formosa Chemical & Fiber Corp’s new 600,000 tonne/year facility at Ningbo in eastern China, due mainly to political reasons, failed to ameliorate the overcapacity situation.

“Just from the supply’s point of view, we can see that the PTA market is oversupplied and no wonder that customers are bargaining for lower prices with little concern of not getting their supplies,” said a source from Far Eastern Textile, the largest polyester producer in Taiwan and one of the biggest globally.

It was under such pressure that PTA prices fell almost unabated in 2007, from around $950/tonne (€646/tonne) CFR (cost and freight) China in May to mid-December’s $815/tonne.

“The downstream sectors could not only take their time to buy PTA amid such overcapacity, they were also not doing as well as expected in the second half of 2007, so offtake was simply slow,” said an official from South Holdings.

It owns a 200,000 tonne/year polyester filament yarn unit at Shaoxing in China.

“This year [2007], the downstream sector expanded much less slowly compared to previous years, but the PTA sector grew so much, so I’m not surprised that I can get bargain prices,” said the procurement manager of Shaoxing Cifu, a major polyester producer in China.

Unofficial estimates by the country’s caucus of polyester producers in eastern China shows that the industry added another 2-2.5m tonnes/year of new polycondensation capacities in 2007.

In 2008, this figure could rise sharply to around 3-3.5m tonnes, suggesting that demand for PTA would improve tremendously.

“But we should not celebrate too early, as most of these new [polyester] capacities would start only in the second or third quarters of 2008, and the downstream sector still need time to digest the earlier PTA overcapacity,” said a source from Tuntex Petrochemical, a 440,000 tonne/year PTA producer in Taiwan.

However, most players were already rather sanguine, who saw that the so-called “PTA nightmare” of lower margins ending by the end of 2008, slightly earlier than original expectations of end-2009 when new PX supplies flow into the market.

“When the market first started talking about this [nightmare] way back [in 2005], it was like it would end only in end-2009 based on the assumption that additional PX by then would allow PTA to see better margins,” said a source from Samsung Petrochemical Co, the biggest PTA maker in Korea.

“It had turned out to be slightly better than expected for PTA producers after all,” said a source from Taekwang Industrial, which started up a new line in Korea in November last year.

“Now we see that things should get better; we can earn some money again towards the end of [2008],” he added.

This meant that PX spot players which kept to the sidelines for the most of 2007, due to the bearish sentiment enveloping the market, could once again return.

“We were all concerned how the PTA sector was getting from bad to worse, and affecting the PX-PTA chain overall this year,” said a Singapore-based trader working for a major American trading company.

“Now with PTA seeing the prospects of improving their margins, maybe PX could get better too,” said the trader.

Nevertheless, the most cautious PX players did not seem to see things this way. In fact, the end of the PTA nightmare might be the precursor of tough days for PX sellers, they said.

“More new PX capacities are starting up between 2008 and 2009, especially in China, Korea and the Middle East,” said an official from S-Oil, a mid-sized PX supplier in Korea.

Some of these PX makers, particularly those in Korea and Japan, fear that the aggressive gains in new PX capacities could mean PX margins getting squeezed towards the end of 2008, and PX sellers’ own nightmare could very well start in 2009.

“This would be dreadful,” said a source from CPC Corp of Taiwan, a PX producer. “First, we see PTA collapsing on their overcapacity but crude prices kept rising, so we PX makers suffered in [the latter half of] 2007.

“Now, if it’s really like what the market predicts, I think PX makers could make money only for a very short time when PTA’s margins return in the second half of 2008, if it does happen; maybe we won’t even make any [money], as crude and naphtha would be so high and PX prices won’t shoot up like them,” said the CPC source.

($1 = €0.68)

By: Salmon Aidan Lee
+65 6780 4359

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