By John Richardson
HERE is a historical account of what has gone wrong with China’s polyester industry:
- Apparel and non-apparel manufacturers were first encouraged to back-integrate to polyester fibres production and then to purified terephthalic (PTA) as the central government sought to develop the economy through import substitution. This might have been fine without decision making ending up in the hands of people with skewed incentives.
- But local governments controlled too many decisions. They sanctioned polyester fibre and PTA project without too many questions being asked about their viability, as they wanted to hit local GDP growth targets and needed to make money from land sales in order to pay their bills.
- As for the investors, their view was, “So what if this goes wrong? Lending costs are so cheap my project is a no brainer and, anyway, even if I go bust there is no effective bankruptcy process in China. If the worst comes to the worst, I can just get on a plane and go and live in my Singapore condo”.
- One of the questions that should have been asked about the viability of each project was, “How long will the demographic dividend, which has kept our labour costs so low, come to an end?” The answer, even as long as a decade ago, should have been, ‘The one-child policy means that the dividend is already running out”. Apparel and non-apparel production in China’s developed provinces continues to move offshore to cheaper labour cost locations such as Bangladesh.
- Another question that should have been asked was, “Is the surge in cotton prices really that sustainable?” The answer to a thorough investigation into this critical issue would have been, ‘No” because the rise in the cost of cotton was driven by speculation. Cotton prices peaked at 97.35c/lb on 24 March of this year. Since then, they have fallen by a third to 65c/lb. They have now fallen for 11 straight weeks – the longest slump in 55 years, according to Bloomberg.
Because of all of the above, over-investment in the polyester chain is alarming. The chart above gives the example of PTA.
Overseas suppliers of PTA to China are quite obviously facing a disappearing market and so will have to close capacity down. Import volumes of PTA were just 705,000 tonnes in H1 of this year compared with 1.6m tonnes in H1 2013 and 3.1m tonnes in the first half of 2012, according to Global Trade Information Services.
And privately owned local PTA players, especially the ones with no captive feedstock paraxylene (PX) supply, may no longer be as safe from bankruptcy as they once thought. A change in government policy is forcing consolidation across many oversupplied manufacturing industries.
The other implication could be a switch to much higher blends of cotton versus polyester by global apparel and non-apparel manufacturers, given the extent of the oversupply in cotton.
The only thing that might rescue the polyester chain from this switch might be a collapse in the oil price. This would, of course, make PX,PTA and thus polyester fibre a lot more cost competitive versus cotton.
But a collapse in the oil price might well say something alarming about the global economy.