China Consolidation? Forget It in Purified Terephthalic Acid

Business, China, Company Strategy, Economics, Fibre Intermediates

ChinaPTA3

By John Richardson

TOO many people still assume that the above kind of chart always leads to capacity closures in any industry that is as oversupplied as purified terephthalic acid (PTA) is in China right now. In 2015, we estimate that China’s capacity will total 4.6 million tonnes/year versus consumption of just 3 million tonnes.

But history tells us something very different. In 1997-1998, during the Asian Financial Crisis, for example, the consensus view was that lots of South Korean cracker and derivative plants would have to shut down – again because of oversupply. Instead, there was a government-encouraged restructuring of ownership followed by substantial capacity expansions.

Elsewhere in Asia there have been many other stories of governments stepping into support distressed petrochemicals businesses for the sake of wider national economic value. Jobs are often put before straightforward cost-per-tonne of production economics.

So to, of course, is the case in China, as I discussed yesterday when I looked at the country’s polyvinyl chloride (PVC) industry.

In the case of PVC, we are talking about very small plants sometimes remaining open because they are located in western provinces where the creation of new, low value manufacturing jobs is absolutely crucial.

And in the short term in the PVC business, it seems likely that the focus will be on raising rather reducing production in order to boost exports as compensation for weaker domestic growth.

China’s PTA industry – the long term outlook

But the story for PTA is different because China’s plants are very much state-of-the-art. Most are world-scale facilities, and so why should they close down at all?

To give you some data to back this up, the average PTA producer in China in 2000 had a capacity of just 213,000 tonnes/year, according to ICIS Consulting. This compared with 335,000 tonnes/year in nearby South Korea.

Wind the clock forward to this year and the average Chinese producer has a capacity of no less than 1 million tonnes/year. Eighteen of China’s 43 PTA producers have capacities of more than a million tonnes a year, four of which are at over 2 million tonnes/year with one producer in excess of 3 million tonnes/year. The average South Korean producer has an average capacity of just 413,000 tonnes/year.

And yet I have heard talk in the global PTA industry of plant closures in China creating more space for other producers. As I said, even using the very limited cost-per-tonne of production view of the world, this isn’t going to happen.

But beyond this limited and so failed way of viewing at the world, the same factors that will shape the future of PVC in China will also shape the future of PTA – as in PTA, too, keeping these plants open over the long term will help grow downstream employment.

What about, however, the threat to China’s PTA business from rising labour costs in the country’s eastern provinces? This is forcing ever-greater numbers of apparel and non-apparel manufacturers to leave coastal China either for inland provinces or for other countries such as Bangladesh and Vietnam, where labour costs are lower.

I don’t think this matters at all for China’s PTA business, and here are my three reasons why:

1. Better rail links make it possible to cheaply and quickly move PTA and/or polyester fibre and polyester chips to inland provinces.
2. You will increasingly see Chinese textile and garment manufacturers buying into overseas competitors. These Chinese manufacturers will often have access to their polyester fibre, chips and PTA raw material supplies.
3. And again, China’s government will play a role here. They will provide financial incentives for  apparel and non-apparel manufacturers to go overseas in order to build China’s zone of economic influence. This will be especially the case if a manufacturer wants to move to a poor neighbouring country such as Myanmar of Cambodia, the economic development of which is a core part of China’s New Silk Road initiative.

It is also important to note, as I discussed last year, that China might even move to greater self-sufficiency further up the polyester chain – in paraxylene. This is a subject I shall return to in later posts.

China’s PTA business in the short term

The above chart also shows you that we expect China’s average PTA operating rate to be around 65% in 2015, well below what is normally defined as healthy for the industry. This is the result of the slowdown in China’s economy, which has left the global PTA industry so badly oversupplied.

Any overseas PTA producer who had foreseen the extent of China’s slowdown will not be at all surprised by the chart below:

ChinaPTAimports

The chart hows that  China’s PTA imports totalled 5.4 million tonnes in 2012. Last year, this fell to 1.2m tonnes.

And  In January-July of this year, imports totalled 388,000 tonnes. This compares with 751,000 tonnes during the same six months of 2014. Meanwhile, in H1 2015 exports totalled 330,000 tonnes as opposed to 232,000 tonnes in H1 of last year.

It is not unreasonable to, as a result, assume that PTA in China will be the same as PVC: Producers will continue to raise exports, quite possibly with the support of an even weaker Yuan and/or with other government export subsidies, in order to compensate for a weaker local economy.

And, as I said, China’s PTA industry has vastly better economies of scale than its PVC sector – and so has the potential to win bigger global market share.

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