PET presents a mixed outlook

Half empty, half full

16 October 2008 16:20  [Source: ICB]

Feedstock and energy costs, capacity worries and shifting trade patterns are keeping PET makers around the world on edge. ICIS pricing journalists report on the impact

NORTH AMERICA

Landon Feller/Houston

The North American bottle-grade PET sector is a maturing market. Growth, estimated at 1-3% in 2008, is expected to average 3-4% over the long term. That compares with traditional rates of around double the growth of the US GDP throughout the 1980s and 1990s.

With capacity utilization estimated at 90%, growth in the North Atlantic Free Trade Association region has declined from the 250,000 tonnes/year seen before 2005 to around 175,000 tonnes/year.

Having gained significant share from aluminum and glass during its early years, the virgin PET industry now faces challenges associated with lightweighting of bottles and the burgeoning use of recycled PET in food and beverage applications.

Negative public perception of plastics and the consumer trend away from carbonated sugary beverages have also been cited as threats to continued growth.

Despite these challenges, North American producers see positive prospects as global PET trade flows are expected to shift toward more regionalized sourcing and sales over the next few years.

Current approaches to staying competitive include diversifying into new markets, buying or building assets, and developing new technologies.

At the start of September 2008, PET prices in North America were in the high-80s to 90 cents/lb ($1,900-2,000/tonne), or roughly 25% higher than the average September PET contract during the preceding 10 years.

Market expectations were that PET values would continue to be driven by movements in crude oil, as they relate to feedstocks paraxylene (PX) and monoethylene glycol (MEG).

EUROPE

Edward Cox/London

SEVERE COST pressure and poor demand for bottle-grade polyethylene terephthalate (PET) led to a disappointing summer peak season for producers, who ran at reduced rates, pessimistic of the short-term outlook.

Between March and June, upstream purified terephthalic acid (PTA) contract costs rose by 13%. PET prices failed to follow, however, as general economic weakness in Europe suppressed consumer demand for bottle-grade, and supply exceeded demand.

Operating rates of 50-70% were still being reported in September, when Artenius, the PET division of Spain-based producer La Seda de Barcelona, ceased production at its 160,000 tonne/year San Roque site in Spain, citing poor market conditions. Little improvement was expected in October.

Smaller producers have been hit hardest by 2008's record feedstock and energy costs. For example, France's only PET producer, Tergal Industries, has renewed its search for a buyer after running into debt with the need for a receiver to cosign every payment.

European sellers have been watchful of new Middle East capacity that is likely to supply Europe. Oman-based Octal is due to start up 300,000 tonnes/year of capacity in Muscat, Oman, before the end of 2008, with a further 500,000 tonnes/year planned by 2010. Europe would be one of the target destinations for the material.

"We expect between 350,000 and 400,000 tonnes of extra PET to come online in the Middle East in 2009," says a major European producer. "Margins are terrible in Europe and there is no space for all of us."

These are serious volumes: Europe's own nameplate capacity is just over 3m tonnes/year. Buyers have been looking for well-priced imports, especially from the Middle East and Pakistan, and this will continue to pressurize domestic European pricing.

Given competition from abroad, high local feedstock costs and a lack of upward integration, further consolidation of the market is expected in Europe. Two global PET leaders, Jakarta-based Indorama and La Seda de Barcelona, were discussing some form of integration earlier in the year.

New 100% recycled PET products were taking more market share, with PET the most commonly recycled plastic - collection rates doubled from 2006 to 2007 in Europe. This was a concern for virgin PET producers but was overshadowed by more pressing factors.

LATIN AMERICA

Landon Feller/Houston

Latin American PET markets show continued growth potential, but economic woes combined with limited sources of raw material and energy present challenges.

Argentina, Brazil and Colombia are home to only one major PET producer each. Although Latin America is rich in resources, more investment is needed to get the materials to market.

Italian producer Mossi & Ghisolfi is expanding capacity in Brazil and looking to ward off competitors as its raw material supplier, state-owned petroleum company Petrobras, seeks partnerships to expand feedstock capacity. However, the project is still years from completion.

Other players in South America are relegated to importer status, which can be a boon for West Coast markets as volatility in Asian resin markets has allowed savvy importers to stock up when prices are low. This is less true on the northern and eastern coasts, where demand is high and buyers pay more for overseas tonnage.

Growth sectors that have slowed in North America, such as carbonated soft drinks, remain healthy in Latin America. But the US economic slowdown has sent pangs of doubt and fear through the investment circles of Central and South America.

With PET supply presently balanced with demand among producing countries, sellers in Brazil and Argentina will seek to remain competitive without sacrificing vital business. Variable costs, especially feedstocks and labour, will dictate margin levels and profitability going forward. Barring further production problems, sellers will still face a threat of oversupply if buyers flock to imports at the start of the high-demand southern summer months.

ASIA

Chou Hui Hong/Singapore

Led by the region's largest producer, China, the Asian PET market is expected to consolidate in 2009. Chinese PET bottle chip producers could see profit margins erode further next year as a result of projected lower export sales due to quality issues, additional non-Chinese capacity growth and financial turmoil in the US and Europe.

India, the region's next-largest player, could also suffer from lower PET bottle chip foreign orders with its Generalized System Preferences (GSP) status to the US likely to be terminated by the middle of 2009. Expected growth in Middle Eastern PET capacities is expected to further reduce sales volumes to the region, which has always been a key market for Indian sellers.

Indonesia, the other Asian country with GSP status under scrutiny from Washington, could have its tax-free status for PET bottle chip exports to the US revoked by June next year. This has Korean, Taiwanese and other Asian makers concerned that a glut of PET bottle chips from Indonesia and India will be competing for limited buyers in 2009. Markets such as Latin America and Europe, which have always provided high margins for Asian producers, could intensify the price war among the region's sellers.

Asia's PET bottle chip prices, however, could get some support from a new growth area - beer bottles - with a product launched in Qingdao, China, early in September.

In the PET film chip market, prices are expected to remain stable to firm next year. Demand for consumer goods, such as electronic items, is expected to remain stable in 2009, which could help sustain demand for PET film chips.

Recycled PET (rPET) has yet to take off in Asia, owing to the difficulty in collecting used bottles. In addition, the extra 10% production costs of rPET compared with making virgin PET, and stringent hygiene standards have made it unfeasible to makers and buyers.

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