FocusAsia PX, PTA rally may fizzle out on demand fundamentals

By Malini Hariharan and Becky Zhang

MUMBAI (ICIS)--Spot paraxylene (PX) and purified terephthalic acid (PTA) prices in Asia may weaken after a recent sharp rally, partly because of uncertain demand outlook from the downstream polyester sector, market players said on Friday.

Based on ICIS data, PX hit a two-year high of $1,265-1,275/tonne (€911-918/tonne) CFR (cost and freight) China/Taiwan in mid-October, while PTA touched a 26-month high of  $1,035-1,065/tonne CFR China, on the back of strong demand.

PX was trading softer on Friday at $1,235/tonne CFR China/Taiwan, but would still likely post week-on-week gains, market sources said. PTA, on the other hand, was being quoted at $1,040-1,065/tonne CFR China this week, they said.

PX and PTA logged increases of 9.3 % and 11.4%, respectively, since the start of the year, while polyester staple fibre prices (PSF) for 1.4 denier had risen 30% over the same period to $1,570/tonne FOB (free on board) China - a level last seen before the financial crisis in 2008, according to ICIS.

PSF economics had reversed since the second quarter mainly because of brisk demand, said two Chinese producers.

Domestic PSF margins in China remained at around CNY2,169/tonne ($324/tonne), the historic high hit in early October (see chart), with the average margins doubling this month from September, market sources said.

“Everyone is wondering what’s going on? We are back to square one now; across the chain prices are looking the same as January 2008,” said Leonard de Guzman of consultancy Dewitt & Co.

Recent plant shutdowns/troubles that cut PX supply helped producers raise prices, successfully raising the PX-naphtha spreads to more than $450/tonne in October from around $250/tonne last quarter.

“PX producers are at last getting a piece of the profit; it is finally tight,” de Guzman said.

Operating hitches at PX facilities of CNOOC Kings, Fujia Dahua and Oman Aromatics, along with a reduction in Iranian exports following the country’s decision to feed reformate straight to gasoline production had tightened Asian PX supply at a time when PTA and polyester plants were running flat out.

Meanwhile, Chinese PX plants were running at reduced rates of 70-80% in August and September, forcing some buyers to seek imports, thereby pushing spot prices higher.

“People were caught off guard by the prices and demand seen in October. All of a sudden there was a newsflash that cotton was too expensive and that substitution demand for polyester would increase; everyone has been rushing to buy,” explained de Guzman.

He added that polyester was completely driven by cotton with buyers deciding between paying $1,900/tonne for polyester or $3,000/tonne CFR China for cotton.

Cotton, which has been on an upward spiral since early this year, moved even higher after the August floods in Pakistan, damaged crops.

Earlier this week, December futures hit a 140-year high of $1.29/lb on the Intercontinental Exchange (ICE), on strong demand from China against possibly lower production in the country.

While this has, on paper, created room for further price hikes along the polyester chain, market players said the outlook remained hazy.

There were concerns that cotton would see a price correction as it was overvalued.

“The current high prices could also result in new acreage being added which would result in higher cotton production next year,” said a leading polyester producer.

But the cotton shortage could last until next August and final volumes would also depend on weather condition.

"We don't see much potential downside for cotton prices," said a major Taiwanese polyester producer.

Upstream, the tightness in PX supply was expected to ease by the end of this year, knocking off an important support to spot prices.

“The original expectation was that cotton prices would fall in Q4 and drag down PX and PTA prices; so PTA producers delayed turnarounds to this quarter which would result in lower demand for PX,” pointed out de Guzman.

The shutdowns at PTA plants would tighten supply of the material, while demand was expected to spike as nearly 1.2m tonnes/year of new polyester capacity came on stream in China during August-September. By the end of the year, China’s total polyester capacity was projected to grow 8% to 28m tonnes/year.

But de Guzman said he did not see room for much improvement in the polyester market as producers continued to ramp up production to maximize profits.

“The issue is that margins are so huge that producers are running above nameplate capacity; stocks are building up and after a while producers will start competing by either cutting prices or cutting operating rates.”

“It is going to get bloody,” he warned.

He also pointed out that polyester buyers were resisting paying higher prices.

“They would rather shut down; they can’t afford to pay more,” he said.

Further downstream, Chinese textile factories were reluctant to accept spikes in costs of cotton and polyester.

"They have slowed down purchasing because price increases of end-products cannot catch up with the jumps in raw materials," said a Chinese polyester maker.

Transaction volumes at the China Textile City had dropped to 5.3-5.5m meters/day this week, down from 6.5-6.7m meters/day in mid-October.

Meanwhile, de Guzman said that the PTA and PX markets may not see much support from crude oil values, which he expected to remain in the $70-80 range in the fourth quarter.

“Some people are projecting $95/bbl, but we do not see it happening when the US gasoline season is over,” he said.

At noon, US crude futures were trading at $81.75/bbl, down 43 cents/bbl from Thursday amid declines in leading Asian equity markets.

With additional reporting by Bohan Loh

($1 = €0.72)