PTA expansions threaten margins

28 May 2012 00:00  [Source: ICB]

Extra product in Asia, mostly from China and India, threatens overcapacity, and polyester margins have come under pressure because of reduced demand growth rates

Asia's purified terephthalic acid (PTA) capacity is expected to reach 69m tonnes/year in 2015, a 60% increase from 43m tonnes/year in 2011. The main capacity boost in the next four years will come from China and India.


 Pic credit: Rex Features

In China, 11 new plants will come on stream in the next three years, with a total new capacity of 18.5m tonnes/year. The country's total PTA capacity will reach 39m tonnes/year in 2015, or nearly double that of 2011. The new plants will mostly have large capacities varying from 1.4m tonnes/year to 2.2m tonnes/year.

India plans to construct new PTA projects to help ease its tight domestic supply, which had hampered local polyester production in recent years. Commercial operations are expected to begin at the new capacities in 2013-2015, including three new plants with a total capacity of 3.3m tonnes/year.

In other parts of Asia, Taiwan is expected to start up a new 2m tonne/year plant in early 2014, mainly to target export markets such as China and India.

Asia's PTA producers have suffered losses since the end of September 2011 after PTA prices fell in line with a slowdown in downstream polyester consumption and a 4m tonne/year PTA capacity increase in China.

PTA margins have since fallen to minus $64/tonne, from a peak of $283/tonne in March 2011, on the back of surging feedstock paraxylene (PX) prices because of firm energy values and tight supply.

Market economics remained poor going into April 2012, but are expected to recover in the second quarter of 2012 as PTA production cutbacks in April were expected to tighten supply and underpin prices.

Asia's PTA margins are likely to worsen in the second half of 2012 after a spate of new PTA capacities totaling 8.3m tonnes/year come on line in China, surpassing the rate of expansion in both the upstream paraxylene (PX) and downstream polyester markets.

While overcapacity of polyester in 2012-2015 may absorb extra PTA supply, the tight availability of PX supply may limit PTA production during the same period.

Asia's polyester production exceeded 41m tonnes in 2011, up by 8% from the previous year. Although polyester growth fell sharply, compared with the double-digit growth in 2010, the Asian market has shown resilience in the face of economic uncertainties in Europe and the US.

Polyester growth is likely to remain resilient in 2012, being led by increasing domestic ­consumption in China and India, but the expected polyester overcapacity is likely to restrain demand growth to around 6%/year in 2013-2015.

Asia's polyester capacity reached 50m tonnes/year in 2011, with the rate of expansion set to peak in 2012-2013. Lucrative margins in 2010-2011 and potential demand growth spurred investments and the rate of growth.

Asia will see an additional 15.5m tonnes/year of polyester capacity in the next two years, increasing its total capacity by 31% to more than 66m tonnes/year in 2013.

Growth is expected to slow to 5-6%/year in 2014-2015 as overcapacity dampens polyester margins and intensifies market competition in Asia. The overcapacity will drag down overall operating rates accordingly to a low of 70-73% in 2013-2015.

The strong demand growth in China's polyester industry in 2010 extended into the first half of 2011, but weakened in the second half as the government tightened monetary policy to tame accelerated inflation.

Nevertheless, the country's polyester consumption grew by 10% year on year to reach 28m tonnes in 2011.

China is to bring on line additional polyester capacities of around 6.7m tonnes/year in 2012 and another 5m tonnes/year in 2013, boosting its total capacity to close to 44m tonnes/year by 2013. This will drive up China's demand for feedstock PTA and mono­ethylene glycol (MEG), but also result in stiff competition among polyester producers.

Operating rates at Chinese polyester plants are looking likely to drop to a low of around 73% in 2013-2014 from the peak of 90% seen in 2010.

India's polyester demand growth fell significantly to 9% in 2011 from as high as 18% in the previous year.

Most polyester makers deemed the growth figure as healthy and said the surge seen in 2010 was a rebound from the 2008 recession, and therefore unsustainable.

Continued strong demand for polyester, which grew from a relatively small base, is expected to sustain India's relatively high growth rates into 2015.

India's polyester producers have long been sufferers of variable feedstock PTA supply. Intermittent production problems at Japan's Mitsubishi PTA plant in Haldia, West Bengal state, since its start-up in 2010, have forced India to compete with other Asia countries for imported PTA.

India's reliance on PTA imports is expected to rise further in 2012-2013 because of massive polyester capacity expansions in the country.

A total of 1.9m tonnes/year of new capacity is set to come on stream, thus boosting the country's polyester capacity to 7.8m tonnes/year in 2013.

Polyester makers expect margins to be squeezed from 2012. Asia's polyester makers enjoyed high margins in 2011 comparable with 2010, as they were able to pass on higher feedstock costs to consumers with the support of strong demand from Asia's textile industry.

Filament yarn accounted for more than half of Asia's total polyester production in 2010, while China produced 70% of Asia's polyester yarn in that year.

Chinese partially oriented yarn (POY) for 150 denier/48 filament prices stood above Chinese yuan (CNY) 14,000/tonne ($2,219/tonne) EXW (ex-works) for eight consecutive months from the end of January to the end of September 2011 - a hefty level not seen in the past 10 years, except in November 2010 when prices surged above that level for a short period.

The price strength in 2011 contributed to an average margin of CNY1,163/tonne ($184/tonne) or a 9% profit ratio during the period, compared with CNY1,012/tonne ($160/tonne) and 11% for the same period in 2010.

The market economics were reversed in November 2011 as slower GDP growth in China suppressed consumption.

Polyester makers were in a difficult situation, where feedstock prices remained high as a result of firmer energy values and political unrest, while downstream demand declined in tandem with slower economic growth.

This situation is expected to continue into the first half of 2012.

With massive capacity expansions coming up in 2012-2013, mainly for polyester yarn, polyester producers will be faced with the challenges of higher costs, weaker demand and eroding margins.

This is an update of an article that first appeared in the APIC 2012 Supplement prepared by The Chemical Daily and ICIS on behalf of this year's APIC organizer Malaysian Petrochemical Association (MPA).

By: Becky Zhang
+65 6780 4359

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