Polyester Another Victim Of Hype

Cotton2%20Nov12.pngBy John Richardson

SEVERAL major petrochemical companies only have one scenario for China, which is that its economy will continue to grow at a rapid rate, the blog has been told by people working for these companies.

Similarly, as fellow blogger Paul Hodges pointed out earlier this week, when the great synthetic fibre-chain investment boom was in full swing a couple of years ago, nobody seemed to think too hard about the possibility that cotton prices might revert to the mean.

“Sadly, however, it is the people who did not believe the hype around higher prices who will have to pick up the pieces, now that traders have made their money and left the stage,” writes Hodges.

But, as the chart above shows, cotton prices have returned to the 50c-70c/lb that has been the case most of the time since 1982.

Polyester competes with cotton and, thus, this has damaged demand growth for polyester.

Cotton stocks in China are now sufficient to cover six years of imports, according to Bloomberg. 

Thanks to the polyester-chain investment frenzy, this has occurred at a time of the commissioning of big new capacities.

“China has so far added a total of 6.6m tonne/year of new purified terephthalic acid (PTA) capacity this year, and will add at least another 2MT capacity by the end of the year,” writes ICIS pricing.

“The country’s total PTA capacity is expected to reach 28.7m tonne/year by end-2012. Meanwhile, downstream polyester capacity is expected to expand by 5.1m tonne/year to 37.5m tonne/year in 2012, creating extra consumption for PTA of only around 4.4m tonnes/year.

“Market participants pointed to oversupply as the key factor that has resulted in the long-lasting and wide profit losses across the PTA and polyester supply chain. The situation will not improve until demand improves soundly and supply reduces after industrial restructuring, they said.”

We also wonder whether some of this capacity is in the wrong place, given that China’s rising labour costs have eroded its position as the No1 low-cost apparel and non-apparel exporter to the rest of the world.

The chemicals industry, in this increasingly uncertain world, perhaps needs to spend more time studying potential shifts in demand patterns.

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