WoodMackenzie
In the following article, Salmon Lee, Wood Mackenzie Head of Polyesters, reviews 2019 and outlines how the polyester chain has managed to prove resilient, despite both overcapacity and weak upstream markets.
The polyester chain has had a challenging year in 2019.
It had to come to terms with overcapacity of varying degrees throughout the chain. Additionally, prices spiralled due to weakening upstream costs, while margins – or lack of – became squeezed.
The global economic landscape further tested the limits of market players already facing a difficult year. Nevertheless, what was remarkable was the resilience of the chain – particularly the polyester sector.
Not only did polyester production not tumble, China led the world of polyesters to put in a credible show in downstream markets. This provided a silver lining amid dark clouds and gave hope that 2020 might not be as bad as previously feared.
Overcapacity throughout the supply chain
In 2019, 5.83m tonnes of paraxylene, on an effective basis, joined the market to hit 59m tonnes in total. We expect another 6.96m tonnes to be added next year. Demand for paraxylene grew, but at a much slower rate, totalling around 48.8m tonnes in 2019.
It was clear that oversupply was brewing on the horizon if prevailing utilisation rates of paraxylene units continued at 88-92 per cent, as seen earlier in 2019.
Some market players blamed it on the aggressive addition of Chinese capacities, led by Heng Li Petrochemical and Zhejiang Petrochemical Co. That was just part of the story.
New capacities started up in Brunei too and units brought online in the previous two years also stabilised. Even as consumption from an expanding PTA sector was growing, it became clear towards the end of 2019 that demand was simply unable to absorb the additional supply.
The next thing the market knew, prices started dipping. Spot paraxylene shed about $70 between end-June and end-November. The forecast was for a meek recovery into December and the New Year, however margins for the chief product in the aromatics market have become squeezed beyond recognition this year.
As recently as early 2018, the spread of paraxylene versus naphtha in Asia stood slightly above $400. In comparison, by November this year the delta sat at around $262.
Based purely on costs of isomer xylene and toluene, it was simply no longer feasible for many paraxylene units - dependent on the merchant market for these two raw materials - to keep production going. Indeed, production cutbacks became common for many of such producers, with some likely to see protracted shutdowns. It’s not a pretty picture for the paraxylene market as 2019 ends, especially in Northeast Asia.
Overcapacity in PTA sector more subdued than paraxylene
Overcapacity was not unique for the paraxylene segment, however.
There were two main differences between the PTA and paraxylene capacity jump.
Firstly, while the PTA capacity increases totalled more than 3.5m tonnes this year, rationalisation of existing capacities meant that there was a net decrease between 2018-2019. For paraxylene capacity growth, 2019 was a staggering three-fold spike when compared to 2018.
Secondly, PTA producers - especially in the key Chinese market - appear accustomed to overcapacity - the last time it happened was 2015-2017. PTA producers seemed to know how to effectively adjust utilisation rates to achieve a market balance this year.
While prices of the polyester intermediate fell as well, it was due to the dive in paraxylene costs rather than a supply glut. And mainly because of the dip in paraxylene costs, PTA margins vis-à-vis the feedstock touched a high of $217 in May this year, before easing to more modest levels of $110-120 towards the end of the year.
MEG overcapacity seems most serious
In the opinion of the most seasoned of market watchers, the sharpest drop in margins was seen in the MEG sector.
While prices of the polyester intermediate slipped, mainly because of lower energy numbers and a weakness in ethylene costs earlier this year, it was also under downward pressure. A perceived increase in supply, whether erroneously or otherwise, spelled more bad news for MEG suppliers. New capacities, including those coal-based units producing MEG via the dimethyl oxalate route, jostled for media attention, amplifying the concerns of an oversupply as the New Year approached.
MEG physical markets tighten in Q4 2019
It was all rather unfortunate for MEG producers this year, at least in the eyes of the major producers. Market leader SABIC saw an acute disruption to its MEG production in September following drone attacks on its key oil facilities in the kingdom. Associated gas supply was halted and MEG plants were forced to either take shutdowns or slash operating rates that month.
When prices fell to untenable levels for many MEG producers in H1 2019, many MEG producers in various parts of the world also scaled back output - including coal-based ones in China.
There was a growing overcapacity, but any extra supply was quickly stamped out with the elimination of less competitive units. In fact, inventories of MEG in the storage tanks of coastal China fell to their lowest levels in more than 20 months to 400,000 tonnes by December, while delays in shipments plagued the Chinese market and forced end-users, traders and even suppliers to buy spot to plug shortfalls.
It was little wonder that MEG spot prices started rising by December towards $590-600 for imports, and RMB 5,300 in the local Chinese market, compared to $530-535 and RMB 4,550-4,600 about four weeks earlier.
PTA physical markets also tighten in 2019
This anomaly was the case in the PTA market as well, where prompt, physical material was in dearth for most of the first six months of 2019, while the market was simultaneously obsessed with a perceived supply glut into the further months.
Many market veterans blamed this on the rise of the futures market in the Chinese domestic market, which had nurtured a whole class of market players only focused on the technical analysis of the price curves, with hardly any understanding of the fundamentals in the PTA and MEG markets, and the whole polyester chain.
Boosted by the participation of major funds and/or financial entities, often in close collaboration with leading PTA suppliers, these players took full advantage of the liquidity in the PTA futures market.
They blew the anticipated spike in fresh capacities for both the polyester intermediates and paraxylene somewhat out of proportion, with the local industry media adding more fuel to the flames of fear over ballooning capacities.
However, delays in the actual start-up of several new paraxylene capacities were common. Heng Li Petrochemical’s new paraxylene stabilised only in Q3 this year, while Zhejiang Petrochemical’s paraxylene units have – at the time of writing - yet to run.
Compared to the announced start-up dates of August 2018 for Zhejiang and October last year for Heng Li, the reality was truly different.
As for PTA plants supposed to be starting up this year, all had postponements of at least 2-3 months for various reasons. When it became evident by the year-end that demand from the polyester sector was also far from collapsing, and in extension the spinning, weaving and apparel segments were still performing well, the futures-focused players started to panic as they scrambled to cover short positions.
Headwinds still plague polyester chain, but growth continues
Indeed, despite the ongoing trade war between the US and China, the textile industry in key Chinese markets continued to expand.
In the broader global picture, the US economy continued to perform well despite worries over a looming recession and the trade war throwing a spanner into the economic dynamos of several key countries and/or territories.
Fabric transactions at China Textile City
And in terms of polyester output, while capacity increases globally had been robust at 4.3 per cent year-on-year, the growth in production was even more impressive at 4.9 per cent.
For the key market of China, it was even better where capacity increased 6.2 per cent but production jumped 7.5 per cent. Supported by many smaller but fast-growing economies, such as Turkey and Vietnam, global polyester production hit more than 85m tonnes this year and could trend towards a whopping 90m tonnes in 2020.
To put that in context, as recently as 2014, the world was still just above 65m tonnes in total polymer production.