China Polyester: Failure To Ask The Right Questions

Business, China, Company Strategy, Economics, Fibre Intermediates

PTAAug1Chinacapacity

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.

PREVIOUS POST

The Failure Of Abenomics Should Be No Surprise

31/07/2014

By John Richardson The steepest  decline in Japanese industrial production sinc...

Learn more
NEXT POST

China's Polyethylene Data: Credible Answers Required

04/08/2014

By John Richardson THE extraordinary data on China’s polyethylene (PE)  marke...

Learn more
More posts
Polyethylene producers must avoid repeating the mistakes of Q1
05/06/2020

By John Richardson AFTER a very challenging first quarter, nobody wants to make further write-downs ...

Read
China’s PP production growth could lead to big declines in 2020 imports
01/06/2020

By John Richardson PLEASE DON’T say I didn’t warn you. China is rapidly moving towards polypropy...

Read
Coronavirus, impact on the developing world and the scale of demand losses
29/05/2020

By John Richardson ALL OF us are struggling to come to terms with a collapse in the global economy t...

Read
Coronavirus, reshoring and the polyester industry: Good luck with that
27/05/2020

By John Richardson POLITICIANS, not just including the Populist variety, are talking a lot about res...

Read
Beware of the fragile nature of the oil and petrochemical price recovery
22/05/2020

By John Richardson RECENT rises in oil and petrochemicals prices should not in my view be taken as a...

Read
China petrochemical inventories build on what could be false hopes of a V-shaped rebound
19/05/2020

By John Richardson AS PETROCHEMICALS storage space in China fills up on the hope that the country ca...

Read
Further polyethylene rate cuts seem inevitable with no certainty on who will blink first
18/05/2020

By John Richardson IT IS NOT just a razor-like focus on petrochemicals demand that will get you thro...

Read
What petrochemical companies must do to adapt to a smaller coronavirus economy
15/05/2020

By John Richardson PETROCHEMICAL companies can adapt to the coronavirus New Normal by running their ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more