By John Richardson
The end of the eight-week long bull-run in China's purified terephthalic acid (PTA) pricing might well indicate a wider problem about to beset other petrochemicals: Reality undermining the positive sentiment of the early part of this year.
"PTA prices surged by 10% from early November to early January, mainly led by a strong uptrend in PTA futures (futures contracts on China's Zhengzhou Commodity Exchange)," wrote Becky Zhang, senior ICIS pricing PTA and mono-ethylene (MEG) editor for Asia, in her 18 January report.
"The downward correction in PTA futures that began on 8 January has dampened market sentiment and discussion prices in the physical market," added Becky.
One of the reasons for the dip in the market is buyers retreating to the sidelines ahead of the Chinese New Year, which falls on 10 February.
But the recovery in PTA, in petrochemicals prices in general, in oil prices and in stock markets, has largely been driven by historic economic data: Better purchasing managers' indices, exports and GDP growth etc for China and the US for December and Q4 2012.
The retreat to the sidelines in PTA could, therefore, also reflect:
*Concerns about tighter labour supply and higher wages post-CNY that might well further squeeze the margins of China's textiles and garments manufacturers, resulting in more factory closures.
*Higher environmental compliance costs, and again factory closures, as China's new leaders respond to rising anger over pollution.
*Worries over the strength of textile and garment exports to the West, as a result of economic problems in the US and the Euorozone.
*A problem specific to the polyester chain: Greater substiution of cotton for polyester due to cheaper cotton. Cotton prices fell by 20% in 2012, but have recently recovered as a result of the mini commodities bull run. However, the recovery is not expected to last because of record-high stockpiles.
*The imminent start-up of large amounts of new PTA capacity in China, which was built on the assumption that the future would largely be the same as the past. "Asia's PTA capacity is expected to increase by 12m tonnes/year in 2013, which will outstrip expected polyester expansion of around 8.7m tonnes/year," added Becky, in this ICB article. "Overall PTA operating rates are likely to fall further to 69% in 2013 with the 24% increase of capacity, despite 8% demand growth from the polyester sector. China will see five projects and 10m tonne/year of PTA capacity addition in 2013, increasing its total capacity to 38m tonnes/year by the end of 2013."
In the past, the Chinese government prioritised job creation in low-value manufacturing plants in the country's southern and eastern provinces. This was absolutely essential for social stability because of the demographic dividend of a rapidly increasing working population.
But now the working population is in decline because of the one-child policy.
Tight labour markets mean that the government doesn't have to worry if low-value factories close down because displaced migrant workers will easily find jobs elsewhere, often back home in the countryside.( As part of the effort to narrow the gap between the rich and poor, more government money is being on rural communities.)
China's priority is, instead, to promote higher-value manufacturing as it tries to escape the middle-income trap.
The focus is therefore on energy efficient, environmentally compliant manufacturers making, for example, higher-value technical textiles and fashion garments, rather than producers of cheap shirts and blouses etc.
Even if lost demand for PTA and polyester in China eventually re-appears in inland China, and in other countries such as Vietnam and Bangladesh, where labour costs are lower, sales will decline in the short term.