Source of Picture: ChinaMonthlyReview.Org
Polyester operating rates in China have started to rise on anticipation that the global economic recovery has arrived, according to Leonard DeGuzman, chemicals consultant with DeWitt & Co.
Is this another example of a dangerous price bubble or further proof that we are really emerging from the woods?
"The impact of more plentiful lending only started to affect polyester markets from the second half of July when the synthetic fibre makers started tapping into extra credit lines," he said.
"It's the result of greater confidence that textile and garment exports to the West will rise because the economic recovery is really here."
Polyolefin resin converters have been taking advantage of the huge increase in bank loans since as early as the first quarter.
But their polyester counterparts have displayed more caution because of the textile and garment industry's bigger export dependence.
"You have to realise that it's not just clothing exports that have been affected. Non-apparel going into automobiles and housing have also been hit hard," said DeGuzman.
He warned that the poly-condensation players have yet to see any actual improvement in demand.
"They are just making the assumption that the next big order season from the West for textiles and garments, which begins in September, will be much better than in the spring season."
Another key measure will be the third phase of the next Canton Trade Fair, which includes textiles and garments. This takes place between 31 October and 4 November.
The recovery in pricing and confidence in upstream markets arrived a long time ago.
Benzene was trading at or below naphtha on several occasions late last year.
But prices soared to a ten-week high of $900/tonne FOB (free on board) Korea for the week ending 7 August, according to ICIS pricing - a $55/tonne increase. Naphtha was at $651-652/tonne CFR (cost and freight) Japan.
Overall, reformer margins looked very healthy with toluene at $905-915/tonne FOB Korea and mixed xylenes (MX) at $835-837/tonne FOB Korea.
"Target spreads are $150-180 and so this is a very good position," said DeGuzman.
"This is generally true when crude remains under $100/bbl. When WTI surpassed the $100/bbl mark, reformers expanded their target spreads to $200-220/tonne. They grew as high as $250-270/tonne when oil was above $130/bbl."
The rebound goes back to the deep refinery operating rate cutbacks in China in the fourth quarter of last year, which left the country short of benzene.
Imports, as a result, soared to approximately 507,933 tonnes in January-June compared with 327,982 tonnes for the whole of 2008, according to DeWitt.
Where is it all going? Could a substantial amount have gone into speculation and inventories given that the styrenics and phenol chains have been weak?
The phenol chain had improved in early August, however, although later fell back again on weaker crude prices, said DeGuzman.
"Total benzene inventories in China were at 43,500 tonnes in July which is considered extremely high," he said.
"At above 38,000 tonnes local producers started discounting ex-factory prices in order to move material. Prices start increasing when stocks are at 15,000-23,000 tonnes."
But as of the week starting 10 August, DeGuzman said that inventories had fallen to a "snug" level of 25,000 tonnes."
This is another example of persistently high levels of volatility and uncertainty, making operating rate and inventory mistakes all too easy.
A clear sign that confidence in benzene is high is that pricing is closely tracking crude, he said.
Hydrodealkylation and toluene disproportion units are running flat out in Asia, DeGuzman added.
China's economic recovery has also led to a big rise in coal-based benzene output - a co-product of steel production.
"Operating rates at the coal-based plants were 50-70% in March, but in May rose to 80-85%.
"Logistics have also improved because it's the summer season, making benzene buyers more willing to off-take from the steel producers."
Toluene inventories totalled around 95,000-100,000 tonnes in May and in June were at 90-95,000 tonnes.
At the beginning of August, however, they had fallen to 65,000 tonnes and last week to 53,000 tonnes. Normal inventories are 40,000 tonnes.
The drawdown could be because China's refineries are running harder on the July increases in domestic gasoline and diesel prices.
Moving back down the chain, the overall spreads between mixed MX and paraxylene (PX) look healthy
PX supply has also been tight on several delayed start-ups in China.
Japanese producers have been reluctant to raise PX rates on what they say are poor economics with availability from Japan further constrained by outages, said DeGuzman.
Purified terephthalic acid (PTA) producers seem to have had little trouble absorbing the cost push from PX.
PTA prices were $1,120-1,130/tonne CFR (cost and freight) China on 7 August, a $10/tonne increase over the previous week. Four weeks earlier they were at $1,085-1,095//tonne CFR China.
But, to repeat - what is the extent of the actual improvement in synthetic fibres demand?
There are genuine reasons to be a lot more cheerful than a few months ago.
Chinese manufacturers in general are seeing stronger orders from the West as global oil prices and stock markets remain infused with optimism.
But export improvements are on month-on-month bases.
The textile and garment industry, for example, exported $14bn goods in June, up 13% from the previous month but 10% down on a year ago, said the National Development and Reform Commission.
Positive comparisons are also being drawn with 2006.
This was before capacity in many product chains was ramped up in expectation that 2007 to first half 2008 demand-growth levels would be maintained; synthetic fibres were no exception to this.
The longer the commodity-price rallies continue the harder the potential hard landing.