Biofuels, high crude boosting polyester - Reliance

27 June 2008 10:06  [Source: ICIS news]

BANGKOK (ICIS news)--Upwards pressure on cotton crops from biofuel production should allow polyester makers to hike prices and return to positive margins, a key Indian producer said on Friday.

It was important to see the impact of agro products on aromaticsm, said Rajen Udeshi, president of Reliance Industry's fibre intermediates division, at the 4th ICIS Asian Aromatics and Derivatives conference.

"A lot of agro products are now tracking crude," he said. "You make alcohol in the US from corn, in Brazil from sugar cane. The alcohol is a fuel and as such will track the crude price. Cotton is also an agro product.

"In the US, we are seeing farmers moving production from cotton to corn; cotton used to give the higher yield but now gives the lowest.

"In 2005, if you had one acre of land it gave you $50 if you produced wheat, maybe $60 plus if you produced cotton and $100 if you produced corn. Today, you get $300 for corn, $280 for soya beans and only $130 for cotton."

Government subsidies, Unden said, helped biofuel crop farmers make large profits versus fibres, and added a premium to arable land, in the US in particular.

These factors had both helped inflate cotton prices and diminish supply, he said, leaving polyester producers in an enviable position.

"Cotton production is going to go down," he said, "but the world needs cotton. Hence you will need man-made fibres for clothing applications.

Further to this, the key Indian and Chinese economies would prove exponential growth markets for fibres, he said.

"We now have a world population of 6.2bn," Unden said. "China and India have a combined population of 2.1bn, which is one third of the world population. That is a lot of buying power.

"If cotton production is stagnant, you will need more and more man made fibres and hence more purified terephthalic acid (PTA). For this you need paraxylene (PX), which comes from naphtha, which in turn comes from crude oil."

Hence, crude oil should doubly affect the cost of PX-based polyesters, he said.

"The impact of cotton, the impact of gasoline, and the impact of naphtha on the price of PX are all factors we must understand.

"With crude oil at $140/bbl, and naphtha at $1,150/tonne PX needs to be about $450/tonne higher. So to survive you need PX at $1,550-1,600/tonne.

"People think that we are making money because we are increasing prices, but no. The increases are simply neccessary to meet the rising costs.

"As crude commodities go up, so do polyesters," he said.

Downstream buyers did not understand why prices were moving up so much, Udeshi added. But with an increasingly large differential between polyester fibres and cotton, there should be room for manoeuvre.

"The cotton price is no longer a cap," he said. "The question now is what will happen in 2008 and 2009."

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By: Peter Salisbury
+44 20 8652 3214

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