By Malini Hariharan
One view on the purified terephthalic acid (PTA) market, highlighted by the blog last week, is that operating rates in the next few years will be constrained by a shortage of feedstock of paraxylene (PX).
A rapid buildup in PTA capacity is taking place in China where new plants with a total capacity of 2.8m tones/year are due to start up in the third quarter of this year.
But some analysts are optimistic that earnings for PTA manufacturers will remain robust until 2012.
Polyester capacity continues to be added in China and plants are expected to maintain healthy operating rates.
Analysts at Woori Investment & Securities are predicting a continued 8%/year growth in Chinese demand until 2015 based on increased spending on apparel by urban Chinese and an increase in the use of synthetic fibres as cotton will remain relatively more expensive.
PTA supply is projected to grow by 11.3% in 2012. But the analysts point out that some new PTA producers in China with very large plants of more than 1m tones/year capacity will take time to achieve normal operations.
This includes the Zhjiang Hengyi Group which has a 1.5m tones/year PTA project lined up.
A slow down in the PTA industry is therefore expected only after 2013 when utilization rates start rising.
In the near term, the analysts are predicting a recovery in PTA markets in the third quarter of 2011.
"As the PTA-PX spread has fallen below zero in May on a plunge in PTA prices, concern is increasing the recovery in the PTA industry will weaken. The PTA price decline in 2Q11 is attributed to a rapid demand fall in China, which consumes 64% of global polyester fiber output. We attribute the weak demand to: 1) falling demand for polyester fiber stemming from a drop in cotton prices; 2) liquidity contraction stemming from China's monetary tightening; and 3) reduced power supply to textile producers following power consumption surges in March. Of note, due to the sluggish demand, the inventory cycle has risen sharply from less than ten days in 4Q10 to 4-5 weeks in May," they said in a recent note.
But prices are expected to rebound from September as power restrictions ease after the peak production season ends in August and PTA inventory is depleted. And cotton could once again extend support as abnormal weather conditions such as the flooding of the Mississippi in the US and drought in Hubei province in China are likely to once again curtail production.