Polyester Pricing Outlook During May 2011 (Q2 Analysis)

The interrelated segments of the polyester value chain have been working autonomously, but at a collective level they have had an impact on polyester pricing. Mixed Xylenes cost push impact on Paraxylene was witnessed as the crude oil prices breached $100/barrel. In fact a direct relationship was seen on Paraxylene as the price escalated to $113/barrel. Subsequently with the decline in crude oil to below $100 a parity drop in North American market was witnessed. Further with better sentiments emerging in the European market on the supply of Paraxylene, and keeping in mind parity fluctuation with the Chinese market, a drop was also witnessed. PTA supply positions have remained snug in North America, short in Europe and long in the Far East (i.e., 2000 ktpa start-up of Yizheng Ningbo by mid 2011). North American PTA pricing is a factor of Paraxylene and also influenced by Far Eastern markets; a softening sentiment has pervaded the North American market. Interest rates have been raised by 25 basis points 4 times since the start of 2011, and intermittent increases of 25 basis points as much as 4 times, until the end of Q3 of 2011, are expected in China. A sufficient slow down in feedstock pricing has already been witnessed and if these additional monitory controls are executed, then prices should continue softening for the rest of Q2. Or will a depleted supply chain look to replenish inventories in the backdrop of a high season boosted by demand? MEG side of the business remains stronger, with a general global shortage. KSA's Yanpet, Jubail united (~ 1250 ktpa), LG Chem, Daesan, Samsung, Nan Ya (>600 ktpa), EO outages at Huntsman, Old Worlds turnaround and Ineos Oxide etc. are all contributing to supply tightness.

In the West and particularly North America there is a robust demand of polyester filament and Polyester staple fiber (PSF) in the automobile sector. Upholstery business is making steady gains as well. Further can the demand for polyester in the apparel sector be attributed solely to higher purchasing power of consumers? A closer inspection reveals that this is more a product substitution away from cotton which stood at a historic all time high of $2.1102/lb in March 2011. Increased demand of polyester is indicative of consumer's preference for substituting cotton for polyester. It is not pinpointing to a better economic climate dictated by improved consumer purchasing power. The consumption of consumer textiles have been on the decline, which is being shown in the carpet retail purchases as well as decrease in the demand for wet wipes and a rather lackluster home furnishing sector. Bottle grade PET resin demand is picking up due to seasonality and with tight inventory position it can be expected that downstream demand pull will be maintained. This would result in reasonable operating rates throughout the supply chain and ensure a balance of stocks. Therefore, with polyester resin demand being maintained, due to seasonal impact, as well as a thriving filament and staple fiber sector, we would see steady price changes in the North American market impacted by feedstock price movements. An arbitrage window of Far Eastern resin is likely to open up if there is a price surge during middle to late Q2. The impact of low imports levels, which were the case during most of 2010, will start changing as off shore resin begins making inroads to a more attractive North American market. Similarly with PTA supply issues still impending in European market, PTA imports would be required to maintain downstream operating rates. Not only for PET, but, this would also lend support to currently ailing international PTA prices. Further off shore demand would also help stabilize PET prices in the Far Eastern economies as they look towards export avenues. Sales-to-output ratio of many Chinese polyester yarn plants has finally increased to over 100%, which signifies an upturn in demand in the textile sector. But will the intermittent interest rate increases expected till the end of Q3 have a mitigating effect on demand, thus smother any chance of price strengthening? This phenomenon remains to be seen.

Macro-economically Chinese government intervention on monitory policies will have a far-reaching impact in the medium term on Polyester Pricing. To cap the increasing inflation internal policies have led to the increase of reserve ratio holding of banks, credit limit capping in foreign currencies; lastly and most importantly interest rates have been periodically raised 4 times during the last five months. These financial provisions have the potency to decelerate the GDP growth rate to around 8%, which is seen as a pre-requisite to curtailing inflation. The impacts of these requirements are beginning to manifest in industrial slow down. While the 2nd largest global economy has a vision of diversification with their large inflow of foreign currency, which will further strengthen Renminbi, the Western economies are actively trying to stabilize a rocky boat. Government debt restructuring remains a top priority for EU's economies of Greece, Ireland, Portugal and Spain and an effort of regulation has remained a painstaking process for implementation in United States. While the impact of GDP slowdown, via monitory regulation, should be a relatively quick implementation in Chinese economy, the process of stabilizing Western economies will remain a grueling process.

Further it should not be overlooked that Chinese polyester and feedstock prices have set global benchmarks. These prices have had some economic reasoning, however, artificiality, to limit arbitrage, has defined bias for action for others. The above mentioned economic scenario paints a picture of Western economies trying to chalk a way out their economic quagmire. Consumer sentiment is sedate, which has had a calming impact on demand. These sentiments have also not been conducive to sustaining robust oil futures, but have lent stability. Middle Eastern crisis, still don't have the depth to aggravate oil supply concerns but can be moderate influencers. Therefore there seems to be no imminent threat from high crude oil prices in the near future, but spikes can emerge.

In light of the above facts, it appears that polyester resin downward spiral may be losing its momentum, with Western economies showing stable downstream demand as a sluggish economic U-turn is underway. However, if as expected, interest rates are periodically increased in the Chinese market, by some experts as much as 4 more times till the end of Q3, future polyester prices would be adversely impacted. So while a low point of PET @ $1550 fob may have reached during May for Far Eastern suppliers, however, continued interest rates rise may allow PET resin pricing to operate within a narrow range of $1550 fob. They could max out at $1650 fob as 2011 high season unfolds, before they start retreating due to seasonal downturn. Downstream demand in the Western economies may be helpful in price stabilization in the medium term, but that may be the prime facilitator during 2012.

So for the short-term, we expect a further price reduction. Although an Asian FOB of mid $1400's would mean being pessimistic, but a further reduction to $1500/ton fob is still a possibility before price starts ascending. In the medium-term, till the end of Q3 of 2011, a slow upward trend may allow pricing to stabilize again to the mid $1600 levels, but price breaches of the likes +1900 fobs would remain anecdotal reminders of the possible impact of complex market behavior on polyester pricing. In the long-term, improved consumer & industrial demand in the Western economies will be the prime factors for maintaining strength and stability in the market. 2012 would be the year to watch for sustained demand emerging from this region.

Source: http://ezinearticles.com/6299966

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