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A Game Of Two Halves

Business, China, Company Strategy, Economics, Europe, Fibre Intermediates, Middle East, South Korea, Taiwan, Thailand
By John Richardson on 21-Aug-2012


Source: ICIS


By John Richardson

CHINA’S fibre intermediates industry could end of being a game of two halves in 2012, to use an old football (or soccer for the benefit of our America readers) cliché.

The reason is that the first half of the year was characterised by very weak demand as the overall economy slowed down.

And yet traders still kept buying lots of mono-ethylene glycol (MEG) to ship to China during H1, contributing to a steep rise in imports

“Coastal inventories at one point totalled 900,000 tonnes during the first half, more than enough to meet average monthly demand of around 800,000 tonnes,” said Becky Zhang, ICIS pricing’s Asian fibre intermediates editor.

The same applied to purified terepthalic acid (PTA) and polyester. Everyone had underestimated the extent of the economic slowdown and so inventories down the chain were around one month.

Now inventories down the fibres chain are at two weeks or less as a result of stronger demand growth in Q3.

The market has picked up a little on the build-up to the next peak textiles and garments manufacturing season, which takes place in Q4.

There has been a lot of talk about textile and garment mills being badly affected by a slowdown in exports to Europe during this year.

But Zhang made the point that the mills have been dealing with this problem since 2009 and that, to some extent, they have found compensation through improved domestic sales.

Nevertheless, despite the Q3 pick-up, Zhang now expects that China’s 2012 polyester demand growth will be in the region of 8 percent compared with her earlier estimate of 10 percent.

The Q4 peak season might also turn about to be damp squib, given all the macroeconomic problems.

And in a sign of just how volatile the fibre intermediates business has become, sentiment turned bearish during the week ending 17 August, after several weeks of recovery, added Zhang.

This was the result of a two-day increase in average polyester yarn raw-material inventories in China.

PTA and MEG pricing also declined in response to a weaker PTA futures contract on the Zhengzhou Commodity Exchange.

The futures contract has become an increasingly important guide to short-term physical pricing movements since it was launched in 2006. Every scrap of macroeconomic and oil-market news move the contract.

MEG producers are, however, laughing all the way to the bank because of production problems at several major Middle East plants that have significantly tightened supply.

Zhang added that a reason MEG shipments from the Middle East to China were so high in H1 was that plants were running flat-out on the greater availability of associated gas. More associated gas has become available due to higher OPEC oil output quotas introduced in an attempt to put a cap on expensive crude.

Profitability in the purified terephthalic acid (PTA) business is something altogether different – or to be more precise, it has been non-existent for some producers since late 2011, said Zhang.

The reason is chronic oversupply as a result of new capacities being brought on-stream in China. Eleven new plants are due to start-up over the next three years, with a total capacity of 18.5m tonnes/year. The country’s total PTA capacity is due to reach 39m tonnes/year in 2015 – double that of 2011, according to ICIS.

A further factor is lack of sufficient paraxylene (PX) to supply a lot of these new plants.

“Chinese PTA producers are in a better position than their overseas competitors because they depend mainly on domestic supplies of PX which are more affordable than imports,” said Zhang.

China’s PTA producers have the market muscle to set domestic prices for PTA at levels that further help to guarantee profitability, it has been claimed.

Not so the Thais, Taiwanese and South Koreans who will likely continue to struggle.

China’s PTA industry serves as an example of of two aspects of the New Normal, which are:

*Constant increases in Chinese petrochemicals self-sufficiency, beyond the range of some estimates.

*New producers in China enjoying strong advantages in domestic markets, enabling them to always run at high operating rates.