Cotton prices, as the chart shows, have returned to the 50c-70c/lb range that has dominated since 1982. This proves, once again, that ‘reversion to the mean’ is usually the best investment strategy. Sadly, however, it is the people who did not believe the hype around higher prices who will have to pick up the pieces, now the traders have made their money and left the stage.
The critical impact will be on polyester markets. Polyester traditionally competes with cotton in apparel markets, with manufacturers changing their blends in response to pricing differentials. So one immediate outcome of cotton’s fall is that PTA volumes may well come under pressure. And this problem is likely to be long-lasting, as Bloomberg reports that stocks in China (the largest consumer) are already sufficient to cover 6 years of import requirements.
This would be bad enough news for the PTA industry. But high cotton prices have also helped to stimulate a major wave of new Chinese investment in PTA. As ICIS pricing reported recently:
“China has so far added a total of 6.6MT of new PTA capacity this year, and will add at least another 2MT capacity by the end of the year. The country’s total PTA capacity is expected to reach 28.7MT by end-2012. Meanwhile, downstream polyester capacity is expected to expand by 5.1MT to 37.5MT 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.”
The outcome is an example, on a grand scale, of the problems that can be caused by wishful thinking. The real sufferers will be the existing PTA producers, whose accurate reading of the market has been made irrelevant by the actions of policymakers and new producers.