China’s polyester market warns of demand weakness ahead

Chemical companies

D'turn 26Oct13Something very important seems to be happening in China’s polyester’s markets.

The blog was brought up on these markets in its early days with ICI, when it was part of the team that launched PTA into Asian markets for the first time in the mid-1980s.  It has always seen them as a source of steady growth, with pricing determined by a mix of polyester supply/demand and the delta between PTA and cotton prices.

However, the ICIS comment below suggests a trend change is underway on volume.  Today should be a good period for demand, with no holiday season due till Lunar New Year.  But volume is clearly weak.  Equally, as the chart shows (highlighted by the black lines), PTA prices at $1000/t are back at August 2012 levels.

This combination suggests systemic weakness in the market, and not just a day-to-day fluctuation.  Equally, of course, we all know that China is sitting on massive cotton stocks, some 62% of world levels.  These were built up during its efforts to protect farmer’s incomes.  But they must now be becoming a major disposal problem, with enough cotton available to provide 3 pairs of jeans for every person in the world.

Naphtha and benzene markets suggest Europe is seeing the same issue.  Naphtha prices are equal to August 2012 at $888/t, confirming weakness in crude oil demand.  Whilst benzene prices are down 21% since then.  This is quite extraordinary as benzene has been a supply-driven market since the Crisis began.  Today’s prices suggest end-user demand is even weaker than already low cracker and refinery operating rates would suggest.

One key element of the jigsaw is not yet in place.  US polyethylene prices are still at high levels, suggesting either that US demand is stronger than elsewhere, or that recent supply outages are still having an impact.  Support for the former view is provided by the latest American Chemistry Council Activity Barometer, which is signalling steady growth in industrial production.  Yet ICIS market commentary suggests supply side influences are still very important.

A possible explanation for the Barometer’s reading is that reshoring of production to the US is providing strong support for growth in industrial production.  This is likely to be a continuing trend, as companies look to reduce costs and complexity in their supply chains.  We shall only know the answer in a few months time – for the moment the jury is undecided, as last month’s decline in consumer sentiment may reverse now the US government is working again.

Either way, the data from Europe, Asia and the US provides strong support for the view that we have entered a VUCA world where volatility, uncertainty, complexity and ambiguity dominate the market outlook.  Knowing this, and being prepared for different scenarios to emerge, will be key to business success as we transition to the New Normal.

The chart shows latest benchmark price movements since January 2012 with ICIS pricing comments below:

PTA China, red, down 12%. “Poor polyester margins and continued build-ups of inventories prompted Chinese polyester makers to opt for production cutbacks”
Naphtha Europe, black, down 6%. “Sellers are shifting volumes from the oversupplied European market into Asia, despite poor netbacks, as alternatives such as the US gasoline market and the domestic petrochemical sector continue to be bleak in terms of demand”
Brent crude oil, blue, down 4%
Benzene Europe, green, up 4%. ”Some sellers are holding onto higher priced stocks waiting for some signs of an upward recovery in the market”
HDPE USA export, yellow, up 13%. “Sources said they believe export prices will fall in the next few weeks as global and domestic demand continues to weaken”
US$: yen, orange, up 26%
S&P 500 stock market index, purple, up 37%

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