China’s PTA makers push for cost-linked formula to stem losses

Samuel Wong


Focus story by Samuel Wong

SINGAPORE (ICIS)–Several China’s purified terephthalic acid (PTA) makers are currently pushing for a cost-linked contract formula within the country to stem their losses, industry sources said on Friday.

Concerns over eroding margins because of high production costs, largely attributed by firm feedstock paraxylene (PX) prices have resulted in PTA producers to consider such a route, they added.

PTA makers started to face squeezed margins since the start of 2012 because of huge new PTA capacities being added into the key China market.

Moreover, new capacities have continued to be added into the country despite an oversupplied condition, adding further pressure on spot prices, several market participants said.

By the end of 2014, an additional 4.95m tonne/year of new PTA capacity is expected to come on-stream in China, according to ICIS data. The country’s PTA consumption in 2013 was estimated at 27.4m tonnes against total capacity of 32.5m tonnes.

Since the start of the year, the country saw the start-ups of three new PTA facilities, of around 8.2m tonnes/year in total, ICIS data showed.

In non-China markets, especially in the Middle East and Europe, PTA cost now accounts for 70-100% of their contract formula, with the balance based on spot PTA prices, according to a South Korean producer.

The price under the proposed cost-linked formula is obtained by adding the PX domestic price contract settlement to the PX US-dollar denominated spot average plus Asian Contract Price (ACP).

The resulting value is then multiplied by 0.658, which represents the ratio of the PX needed to make PTA, before a variable cost of Chinese yuan (CNY) of 720/tonne is added to work out the price. The typical PX:PTA production ratio is 660-670kg:1 tonne.

Volume incentive, logistics fee, interest will also be added on to the formula, market sources added.

The variable cost is also likely to change each month depending on the market conditions at the time, according to market participants.

On 5 June, spot PTA prices were assessed at $938-942/tonne CFR (cost & freight) China Main Port (CM), while PX was at $1,282-1,300/tonne CFR CMP, according to ICIS.

At current prices, the spread between PTA spot prices and PX cost stood at $81/tonne, while the usual variable costs that most PTA makers need to break even are at around $100-120/tonne.

“Whether end users are able to absorb such high costs for feedstock PTA following the successful introduction of formula is still a big question,” a trader said.

The market dynamics in Asia will definitely change if this plan pushes through successfully, as other non-China PTA makers will likely to follow such a formula base, market participants added.

According to several market participants, end users are likely to accept such conditions for the first one or two months, and will monitor costs margins for their own businesses.

However, majority of the market participants rated the success rate as 50:50 in the long run.

“A fixed general formula base is going to be tough to set, as different companies have their different cost structure,” a northeast Asia-based producer said.


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