OUTLOOK '20: Asian PTA supply to lengthen, margins to come under pressure

Author: Samuel Wong

2019/12/27

SINGAPORE (ICIS)--Asian purified terephthalic acid (PTA) markets are likely to face a supply burden, with China accelerating its expansion plans, amid a weak demand outlook.

China will see new capacities adding up to a total of 9.6m tonne/year of PTA production by the end of 2020.

The degree of capacity expansion within the region has slowed considerably in the last two years as shown by the chart below.

Healthy margins in the PTA and polyester industry in the previous two years had spurred investments in new capacities.

The bulk of expansion is expected to come on stream in the second half of 2020.

Location Capacity ('000 tonnes/year) Timeline
Hengli Petrochemical Dalian, China 2,500 end-2019
Xinjiang Zhongtai Xinjiang, China 1,200 end-2019
Hengli Petrochemical Dalian, China 2,500 Q2 2020
Xinfengming Group Zhejiang, China 2,200 Q3 2020
Fujian Billion Fujian, China 2,500 Q4 2020
Shenghong Petrochemical Lianyungang, China 2,400 Q4 2020

Reliance on PTA imports has since been a distance past after the influx of expansions of PTA facilities that occurred in 2012.

After the huge expansions that were carried out, as seen on the chart above, the net imports had drastically declined since.

Going forward, despite the country being self-sufficient, China will continue to import for re-export business, credit financing, and the advantage of credit terms on purchases to facilitate cash flow.

Traditionally, Chinese domestic purchases are made on a cash on delivery, while imports can be purchased by issuing letter of credit.

The battle for the export markets would be intense, as China, South Korea, and Taiwan will have to compete for market share.

South Korea and Taiwan had been diversifying its export destinations, as China moved towards self-sufficiency.

There are certain regions that have a huge entry of barrier for China, like antidumping duties (ADDs) and import duties.

South Korean origin materials has an advantage over China for exports to Europe, with the on-going free trade agreement between both countries.

According to ICIS Supply & Demand database, the main export markets for China are Oman, Russia and South Africa.

The next biggest import market after China would be India. The country imported a total of 665,511 tonnes in 2018, and imported a total of 637,085 tonnes from January to September of 2019.

The biggest challenge for 2020 would be demand.

The global macroeconomic environment outlook remains bleak, with majority of GDP growth of various countries being adjusted lower, while the on-going trade war between US and China creates an air of uncertainty.

The GDP growth typically indicates a growth rate for downstream polyester demand for a country.

In addition, society’s move towards a greener and cleaner environment had spurred the movement of increase usage of recyclables.

The EU had set out a target that from 2025, PET bottles will have to contain at least 25% recycled plastic.

Following this movement, Asia is also likely to take steps to keep up with the trend, and this would reduce the demand for PET, and thus reducing the demand for PTA.

In a scenario that supply exceeds demand, production margins are likely to face immense downward pressure.

As seen from the chart above, the spread between feedstock paraxylene (PX) and PTA had trended below the typical healthy level in the fourth quarter of 2019.

A sustained negative production margin would phase out smaller, older, and less efficient PTA facilities within the region.

Newer capacities are in a larger production scale, average at around a minimum of 1m tonne/year of production, compared to older units that are below 500,000 tonnes/year.

In Asia, 34% of total nameplate capacities are above 1m tonne/year, while 30% are below 500,000 tonnes/year.

Out of the facilities that are above 1m tonne/year, 41% of them are above the capacity of 2m tonne/year.

Other than the size of capacities which translate to economic of scale, upward and downward integration of the facilities would be the key to survivability in the current trying times.

Focus article by Samuel Wong