Asian PTA producers face margin pressure by 2013

26 August 2010 18:14  [Source: ICB]

Although demand growth from downstream polyester markets will rise steadily, a glut of new capacity means PTA producers will see margins under severe pressure


Asian purified terephthalic acid (PTA) plants may face fierce competition in 2013, with overall operating rates falling below 80% amid extensive expansion, despite strong projected PTA consumption growth in the region.

A total of 14.5m tonnes/year of new PTA capacity, or 10 new worldscale PTA plants, will come on stream in the next three years, bringing up the overall Asia PTA capacity to 52.5m tonnes/year in 2013, a sharp increase of 38% compared with the 2010 capacity of 38.0m tonnes/year.

Among the new additions, 66% or 9.60m tonnes/year of the new capacity will be located in China, 14% or 2.00m tonnes/year to be in Taiwan, and the remaining 11%, or 1.66m tonnes/year, and 8%, or 1.2m tonnes/year, in India and the Middle East, respectively.

"Most of the new projects and investments were inhibited or delayed by the global financial crisis in 2008. However, strong demand recovery in Asia since late 2009 has prompted another round of investment," says a senior manager with a major Chinese PTA producer.

Capacity growth is expected to speed up from 5-6% from 2007-2010 to as high as 18% in 2012, before it declines back to 8% in 2013.

While two projects are set to be completed between the second quarter (Q2) and Q3 2011 (see table), including China's Zhejiang Yisheng Petrochemical's 1.5m tonne/year No. 3 line and Jiangsu Sanfangxiang Group's 900,000 tonne/year unit, most PTA projects have just started or are about to start construction during 2010-2011.

China's Xianglu Petrochemical broke ground at its 2m tonne/year PTA plant in Zhangzhou, Fujian province, in early 2010. The nameplate capacity will be 2m tonnes/year, say several company sources, higher than the previously reported 1.5m tonnes/year.

China's Tongkun Group obtained approval at the end of 2009 for its 1.5m tonne/year PTA project, which is in the process of signing construction and equipment contracts.

The two firms expect to finish mechanical construction of the plants by 2011 and start commercial production in the first half of 2012.

In the second half of 2012, another two 2m tonne/year giant PTA plants are expected to be put on stream, owned by China's Jiangsu Hengli Chemical Fibre and Oriental Petrochemical (Taiwan), respectively. The two firms have already started infrastructure construction of the projects and are awaiting government approval.

Four other projects expected to be completed in 2013. China-based Zhejiang Yuandong Chemical Fiber Group is bringing on stream its 1.2m tonne/year No. 4 line. Indian Oil Corp. (IndianOil), Reliance Industries and JBF Industries, all Indian, are also starting up units with capacities of 560,000 tonnes/year, 1.1m tonnes/year and 1.2m tonnes/year respectively. These projects have mostly finished feasibility studies and are in the process of obtaining necessary approvals and financing.

"To what extent the large PTA capacity could be utilized depends on the growth of the downstream polyester industry, particularly in the textile industry," says the PTA producer source.

PTA is primarily used in polyester production with polyester fiber taking a large proportion of the global output. In Asia, around 80% of PTA goes into polyester fiber, 15% to polyethylene terephthalate (PET) bottle resin and the remaining 5% to film and other plastic end-uses.

China, which has a total of 28.5m tonnes/year of polyester capacity as of 2010, is estimated to consume around 21.0m tonnes of PTA. The country will therefore take up a 61% market share of market share of Asia's total PTA consumption, estimated at 34.2m tonnes, in 2010.

This year, China's polyester fiber industry has experienced strong recovery in both domestic and export markets, says a major Chinese polyester maker.

"The country's total output of polyester short staple fiber and filament yarn jumped by 15% and 12% year on year, respectively, in the first five months in 2010," says the producer.

The government has set its twelfth five-year plan (2011-2015) for the textile industry to sustain its export growth rate at 8%/year.

Assuming China's PTA consumption will increase by an equivalent 8%/year in the next three years, China will require a total of 26.3m tonnes of PTA in 2013, or about 64% of total Asian PTA consumption, estimated at 41.1m tonnes in 2013.

China is a net importer for PTA, with 33% of its PTA consumption in 2009 relying on imports. But the reliability is expected to decline steadily to below 25% in 2013, along with the expansion of domestic capacity.

Regular import sources to China are Taiwan, Korea, Thailand, and Japan, with imports from the four countries constituting 96% of China's total PTA imports of 6.26m tonnes in 2009, and 99% of 3.31m tonnes imported in the first half of 2010.

"The four net exporting countries will face the significant challenge of losing market share in China due to competition from Chinese domestic PTA plants," says the Chinese PTA producer.

However, a continuous strong growth of Taiwan domestic PTA consumption will help relieve some sales pressure in external markets.

"Taiwan's polyester industry has been recovering quickly in the past two years after hitting a bottom in 2008. We expect this year's domestic PTA consumption to reach close to 2.40m tonnes, up by 7% from 2009," says a domestic sales manager with a major Taiwanese PTA producer.

A sustained healthy growth in Taiwan's polyester industry should be attributed to the persistent efforts that have been made in recent years on product diversification, which helped raise product values and strengthen Taiwanese companies' competitiveness in the light of rising production costs.

"We believe this round of upswing will last for another three to five years, and the annual demand growth for PTA should stay high at around 6-7%," the manager says.

Korea will also see a demand spike in 2011, in tandem with downstream polyester capacity expansion.

According to data provided by a major Korean PTA producer, Korea will have its overall polyester capacity expanded to 4.03m tonnes/year in 2011 from the current 3.67m tonnes/year, which will lead to 11% year-on-year growth in PTA consumption to 3.02m tonnes in 2011. Domestic demand for PTA will remain on an uptrend in the following years, but at a slower pace, to reach 3.11m tonnes in 2013.

India, Asia's second-largest PTA consumer after China, had maintained rapid growth in PTA consumption of as high as 16-18% from 2007-2009. The growth, however, is expected to slow down to around 7-8% from 2009-2011, according to published data at the 2010 Asia Petrochemical Industry Conference, held in Mumbai from May 13-14.

Assuming a stable growth of 7% in the next three years, India will consume a total of 4.36m tonnes of PTA by 2013, or 11% of Asia's total PTA consumption.

"We see huge market potential for India's polyester industry," a major Indian polyester fiber producer says, adding that India produces around one-fifth of polyester products compared with China, although the two countries have a similar population.

India is a net importer of PTA. However, with the start-up of Mitsubishi India's new 800,000 tonne/year PTA plant in early 2010, the country's reliance on imports had significantly reduced.

"PTA supply will be tightened again in 2011 along with the fast-growing polyester industry. This will only be relieved when Reliance and [IndianOil] launch their new PTA plants in 2013," says the polyester producer.

Overall PTA consumption across Asia is therefore estimated at 41.1m tonnes in 2013, with a growth rate of around 6-7%/year in the next three years. It is, meanwhile, assumed that the other Asian countries, including Thailand, Japan, Malaysia, Indonesia and the Middle East, to name but a few, will maintain stable domestic demand for PTA.

"Lower operating rates will definitely mean thinner profit margins for Asian producers because more people are coming to compete for the limited market shares," says a regional market source.

Historic data (see graph right) presents a clear picture of the relationship between profit and operating rates. Most PTA producers faced squeezed margins and therefore reduced operating rates to 81% in 2008, but generous profits in 2010 will result in higher running rates of around 90%.

As most of the Asian PTA producers can see the inevitable result, the smartest ones will try to strengthen their own competitive advantage. "It is the principle of economic cycles, not simply the destiny of the Asian PTA industry," says a major Taiwanese PTA producer.

Becky Zhang is an ICIS markets editor based in Singapore. She covers pricing, news and analysis of Asian PTA and ­monoethylene glycol (MEG).

By: Becky Zhang
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