Asia’s Polyester Producers Get Greedy

By John Richardson

THE current glum mood in the Asian fibre intermediates chain is in stark contrast to the optimism in polyolefin and other petrochemical markets.

A broad-based price rally has occurred following the end of the Chinese New Year (CNY) holidays belying fears, for the time being at least, that China’s credit tightening will force a decline in pricing.

But the contrasting misery in paraxylene (PX) through to bottle and fibre-grade synthetic resins serves as a warning of how overconfidence can be a dangerous thing in this exceptionally uncertain economic environment.

Back in early November it was assumed that Chinese textile and garment manufacturers would – as they have nearly always done in recent history -benefit from a pick-up in orders from the US.

So stocks of paraxylene (PX), purified terephthalic acid (PTA) and synthetic fibres began to build up.

“What also led to the inventory build at a time when business would normally be fairly quiet were expectations of higher crude prices,” said Leonard De Guzman, Philippine-based petrochemicals consultant with DeWitt & Co.

The US orders didn’t come in because textile and garment business was lost to Brazilian, Mexican and other non-Asian competitors, and oil prices didn’t go up.

“The cost-consciousness of the Western retailers, such as Wal-Mart and JC Penney, is getting even more ferocious, meaning even Chinese garment manufacturers are not cheap enough,” De Guzman added.

“I just don’t see a quick recovery on the High Street in the US and Europe and this will continue to place pressure on the Asian apparel and non-apparel industries.

“Despite all the talk of rapidly rising domestic consumption in countries such as China, this is still a heavily export-dependent region and so trade with the West remains crucial.”

This trade needs a kick-start ahead of the crucial March-to-May production and sales season.

“What’s stopping this from happening at the moment is cotton prices,” continued De Guzman.

“Very poor harvests in Q4 2009 in China and the US led to the China and New York futures markets registering steep rises over the CNY week.”

Bumper harvests were reported in India, Bangladesh and Pakistan but this had no effect on the cotton price as none of these countries had futures markets, explained De Guzman

“And so now we have synthetic fibre prices being supported by cotton. The textile mills in China, which are running at average operating rates of 60%, need a break from cheaper raw materials.

“The price of cotton is keeping synthetic fibers high as fibre makers are linking their prices to cotton rather than raw materials.”

Fibre economics were very good with staple filament yarn at more than $1500 and raw material costs at $1130, said De Guzman

“This link to cotton is the reason why their customers – the textiles and garment manufacturers – lost orders, and so this could be the wrong decision.

Polyethylene terephthalate (PET) bottle chip economics were very different as producers were struggling to keep their heads above water, he added.

Further upstream from naphtha, margins are being squeezed.

“Naphtha was at $730/tonne CFR Japan recently which compared with spot PX at $1,000-1,020/tonne CFR China,” said De Guzman.

“The PTA producers are on paper actually doing alright. With PX at around $1,000 tonne the minimum needed to cover production costs is $830/tonne CFR China, and so the current PTA price of $950/tonne CFR China is very comfortable.

“But sales or transaction volumes are likely to be very low at the moment, which is why the PTA price hasn’t budged for some time.

“It should fall, but when a PTA producer asks his customer ‘If I cut my price would you buy more?’ the usual answer is no, so there is no incentive to do so.”

Despite the broad-based post-CNY price rallies, De Guzman worries that too many buyers in too many product chains are chasing higher oil prices rather than responding to stronger demand.

“I just don’t see the demand there, not in the fibre chains, not in styrenics – not anywhere in fact.”

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