Asia PTA uptick fizzles out on weak fundamentals

09 October 2008 07:58  [Source: ICIS news]

SINGAPORE (ICIS news) -- Spot prices of purified terephthalic acid (PTA) in Asia have firmed towards $860-865/tonne CFR China in the past three days, following news of the sudden shutdown of a major plant in China and intensified enquiries after the week-long Chinese National Day holidays, buyers and sellers said on Thursday.

 

But the uptick seemed to be losing steam, as market fundamentals remained simply too weak to support much higher PTA numbers.

 

The sudden stoppage of Hualian Sunshine Petrochemical’s three units in China last week meant that some 1.8m tonnes/year of capacity disappeared from the market, and that had caused some buyers to be concerned that they might not get their supplies from the producer, said market watchers.

 

“We’ve confirmed delivery of 14,000 tonnes of PTA from [Hualian Sunshine] this week, I suppose they would not come, at least for the short term,” said the procurement manager of Zhejiang Lianda Polyester, a mid-sized filament yarn maker in Xiaoshan in eastern China.

 

“Our situation is also bad, we have regular supplies of 40,000-50,000 tonnes every month from [Hualian Sunshine], so when they stopped, we started buying aggressively from other sources so as to keep our operations going,” said the deputy general manager of Shaoxing Cifu, a major producer of polyester filament yarn, fibre chips and film-grade chips in eastern China.

 

According to several of Hualian Sunshine’s customers, some of them had paid up in cash first, and would get their cargoes about a few days later.

 

“We can get much cheaper PTA that way, since [Hualian Sunshine] wanted to keep their cash flow going and was in need for cash, and they’re selling cheap,” said an official from Zhejiang Jinxing, a mid-sized polyester filament yarn maker based in Shaoxing in eastern China.

 

In the past three days, PTA deals were reported as high as $875/tonne CFR China, with traders and end-users alike snapping up cargoes at $855-860/tonne CFR China.

 

Similarly, domestic prices in China had also risen towards yuan (CNY) 7,100-7,200/tonne ex-warehouse (EXWH), about CNY50-150/tonne higher than the levels seen before the National Day holidays in end-September.

 

“The production cutbacks among some Korean and Taiwanese PTA producers in the past few months also helped to maintain supply snug,” said a trader with Sinocoast, based in Shanghai.

 

“The current seasonal peak for the polyester and textile industries, even though they may be weaker than in previous years, is also a factor in boosting PTA values,” said an official from China Textile City in Shaoxing, the largest dedicated mercantile exchange in China for textiles and textile-related products.

 

Nevertheless, it seemed by Thursday that the three-day-old uptick seemed to be slowing and prices could reverse trend soon, said market observers.

 

The original belief that Hualian Sunshine could take up to six months to resume production seemed misplaced, said these observers, referring to earlier talk among some Taiwanese and South Korean industry veterans.

 

Rumours were abound that the Hua Xi group of companies, one of the shareholders of Hualian Sunshine, could pump in more cash into the ailing PTA producer and partial production could at least resume next week.

 

“We knew that it’s impossible that [Hualian Sunshine] would stop for a long time,” said an official with Xiang Sheng Polyester, a leading polyester filament yarn and chip maker in eastern China.

 

“In our local culture, we’ve a saying: if you owe just a few millions, you’re dead for sure; but if you owe tens or hundreds of millions, then you’ll definitely survive but you need to keep earning money back to repay your creditors,” said the Xiang Sheng official.

 

“Even if the [Hualian Sunshine] name is gone, I believe that production at the PTA lines would come in one form or another, for the simple reason that so many polyester producers had paid up for the PTA and they could easily force the PX idling in the tanks to be made into the PTA they need so much,” said a trader with Ningbo Cixi Import and Export.

 

Against such a backdrop, it would be naive to believe that PTA pricing could leap into new heights and shrug off the sluggishness which had plagued it for the most of the past three years.

 

“First, there are inadequate bankruptcy laws in China, and so far, you notice no one government body or bank had said anything about the [Hualian Sunshine episode], so we can conclude that the issue is not as serious as perceived,” said a veteran market watcher in Taiwan.

 

“The fundamentals in the market were also still bearish,” added this market watcher, referring to the overcapacity of PTA in Asia and the sharp decline in feedstock paraxylene (PX) costs in the past few weeks.

 

To some extent, the Hualian Sunshine episode had depressed demand for spot PX, as the idled PTA producer was one of the largest spot PX consumers.

 

But also due to tumbling crude and naphtha futures, PX prices had fallen to $970-980/tonne CFR (cost and freight) Taiwan this week, and looked set to slip further.

 

“The global economic climate is so bad, with stocks crashing, with banks closing, and the worst recession in a century coming, tell me, how can PTA prices rise and why would PX and oil prices rise?,” said the procurement manager of a leading PTA producer in Taiwan.

 

In fact, maybe because of the relative firmness in PTA prices these past few days, those producers which had idled their lines or trimmed their operations could be encouraged to rev up their production again soon, given that margins were no longer squeezed as before.

 

“If that happens, then I can say we’re back to square one, because PTA was, is and would still be in oversupply,” said an official from Sam Nam Petrochemical.

 

And given that new capacities in Taiwan’s Loong-der and China’s Dalian could seize on the slightly more bullish picture to start up in the next few weeks, the outlook could quickly turn into a bearish one in no time and PTA prices could dip towards $800/tonne CFR China once again, said market participants.

 

($ 1 = CNY 6.81)

 

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By: Salmon Aidan Lee
+65 6780 4359



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