China’s PTA market moves to self-sufficiency and exports

Consumer demand

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China PTA Mar16Credit conditions are tightening day by day in China.  Companies with good payment records over many years are seeing their borrowing limits cut back.  2016 is indeed proving to be the year that President Xi Jinping “takes the pain of restructuring”.

At the same time, self-sufficiency has become a key strategy for many industries, in line with the objectives of the new 2016 – 2020 Five Year Plan.  The above chart for PTA net trade, the intermediate product for the polyester chain, highlights the result:

  • China had been the world’s largest PTA importer, with rising volumes until 2010/2011
  • Its net imports were 6.5m tonnes in both years, as its stimulus programme expanded
  • But its own capacity was also expanding as part of the stimulus programme
  • Net import volumes have since collapsed as the new plants have come online

They disappeared almost entirely last year.  And even more ominously, exports are ramping up – reaching 620kt.

Cotton global stocks shrinking: ICAC

The issue is that China now has sufficient capacity to supply the entire world demand, as we discuss in our new joint Study with ICIS, Demand – the New Driver for Profit.  And, even worse, is the fact that another part of the stimulus programme caused cotton stocks to climb to all-time record levels.  There is now enough cotton in store to make 3 pairs of jeans for everyone on the planet:

  • International Cotton Advisory Committee data above shows stocks now equal to 92% of production
  • USDA estimates stocks are even higher at 22.6m tonnes (104m bales), with China at 14m tonnes
  • China’s inventory needs to be sold off, but this has been resisted by the military, who are the largest producer
  • Recently, however, cotton prices have fallen below the 60c/lb level, suggesting that sales may be about to start
  • Cotton prices on China’s Zhengzhou futures exchange have fallen back to 2004 levels as a result

PTA producers outside China are already facing major difficulties.  And any sale of the cotton stocks will make the situation very much worse.  But there is more to worry about than just PTA markets.

Other value chains can see the same developments taking place.  PVC is in a very similar position, whilst polypropylene production (PP) is rising fast as China expands its on-purpose propylene capacity.  And its aim under the 5 Year Plan is to to reach 93% self-sufficiency by 2020.

This will have two major implications.  Almost inevitably, China will start to become a major exporter of propylene derivatives, driving down prices and margins.  In turn, this will put pressure on other polymers such as polyethylene, which can be substituted by PP in several key applications.

Of course, it is easier to sit back and decide this will never happen.  That is what we describe as the Comfortable Middle scenario in the Study.  But suppose we are right with our alternative scenario?  What would you do, as a business?  And wouldn’t it make sense to prepare now, whilst there is still time to make contingency plans?

After all, consensus wisdom said China’s growth would never slow down, and oil prices would always stay at $100/bbl. These are painful reminders of the fact that wishful thinking is not always reliable.

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