The actual supply-demand imbalance in PTA has already begun to emerge ahead of schedule
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“The actual supply-demand imbalance in PTA has already begun to emerge. ” The most direct manifestation of the supply-demand imbalance is that, as of mid-May, the actual domestic social inventory of PTA had risen to 3.79 million tons, reaching a new high in nearly five years. The highest level of domestic PTA inventory was recorded in 2015, at 2 million tons. The current inventory level is nearly 90% higher than it was at that time. PTA is the abbreviation for purified terephthalic acid, and it is one of the important bulk organic raw materials. Its main uses are in the production of polyester fibers, polyester bottles, and polyester films, and it is widely applied in various fields such as chemical fibers, light industry, electronics, and construction. Polyester fiber, commonly known as polyester, is the most produced type of synthetic fiber and an important textile raw material. A research report by Wanlian Securities from last September indicated that polyester fiber accounts for about 75% of the total polyester production. This industrial chain can be roughly divided into “crude oil-naphtha-PX-PTA-polyester-weaving-textile and apparel industry”. Bai Xiaodong, a PTA analyst at Longzhong Information, told Jiemian News that although the COVID-19 pandemic has had a certain dampening effect on demand for PTA in downstream industries, moderate profits have encouraged factories to increase their production levels. The industry originally believed that excess capacity in the PTA sector would only arise after the completion of Hengli Petrochemical’s (600346.SH) fifth-phase project, but this point has arrived earlier than expected.
The tight supply balance has been completely disrupted. “High inventory levels are a sign that the supply and demand balance for PTA has been disrupted ahead of schedule.” ”Qiu Qianqian, a PTA analyst at Jinchuang, told Jiemian News that without the COVID-19 pandemic, the industry generally expected an oversupply in the PTA market to occur in the second half of 2020 – as the large new PTA production facilities of the industry’s leading companies were scheduled to come online in the second half of this year. According to incomplete statistics by reporters from Jiemian News, in the second half of this year, it is expected that 10.5 million tons worth of PTA production capacity will come online, involving Hengli Petrochemical’s fifth-phase project, Baihong Group’s Fujian Baihong project, Xinfengming (603225.SH)’s Dushan Energy Phase II project, and Yisheng New Materials’ project.
The PTA market is not isolated. It transfers back and forth between upstream and downstream sectors, and is closely tied to market conditions in areas such as crude oil and polyester. In March this year, Saudi Arabia launched a war on crude oil prices, causing global crude oil prices to plummet; this had an impact on the PTA industry, resulting in a general reduction in the costs of raw materials used in production. During the same period, as the domestic epidemic situation eased, polyester production downstream of PTA resumed at a faster pace, leading to an increase in demand. The processing fee for PTA also started to rise, which in turn contributed to high production rates. According to Qiu Qianqian, under normal circumstances, the profits of PTA companies are calculated based on the processing fee. The average processing cost in this industry is around 600 yuan per ton, and the amount exceeding this price can be considered as the company’s profit. According to Jinchuang Data, in April the PTA processing fee was around 730 yuan per ton, allowing companies to earn a profit of about 130 yuan per ton. This represents an increase of roughly 20% compared to the average processing fee of 580 yuan per ton in the previous month. A report by GF Futures states that although this processing fee is lower than last year’s level, it is still sufficient to ensure that most production facilities can turn a profit.
Since 2017, driven by increased demand resulting from environmental protection upgrades, polyester industry capacity has begun to expand at an accelerated pace. However, the growth rate of upstream PTA capacity has failed to keep up with this expansion in polyester production, resulting in a tight supply-demand balance and high processing costs. As of mid-December last year, the average processing fee for PTA during that year was 1,068 yuan per ton, the highest level in nearly seven years; it increased by 9.2% compared to 2018 and more than 1.3 times compared to 2016. At high profit levels, PTA plants have a strong willingness to operate. As of April 20, the operating rate of PTA plants remained high at 84.05%.
Since 2017, driven by increased demand resulting from environmental protection upgrades, polyester industry capacity has begun to expand at an accelerated pace. However, the growth rate of upstream PTA capacity has failed to keep up with this expansion in polyester production, resulting in a tight supply-demand balance and high processing costs. As of mid-December last year, the average processing fee for PTA during that year was 1,068 yuan per ton, the highest level in nearly seven years; it increased by 9.2% compared to 2018 and more than 1.3 times compared to 2016. At high profit levels, PTA plants have a strong willingness to operate. As of April 20, the operating rate of PTA plants remained high at 84.05%.
As the new PTA production capacity from companies such as Hengli Petrochemical is gradually brought online in the second half of the year, the issue of overcapacity in the industry will become more apparent. Yu Guoliang, the project manager at Sinopec Qilu Petrochemical Planning Institute, told Jiemian News that the additional PTA production capacity this year is expected to reach 15.8 million tons, bringing the total supply to nearly 50 million tons. Yu Guoliang said that the polyester industry plans to add approximately 8 million tons of production capacity this year, with half of that capacity coming online in the second half of the year, or even being delayed until 2021. The total demand for PTA in the polyester industry this year is expected to be around 40 million tons. Based on this calculation, there will be a surplus of about 10 million tons of PTA this year, accounting for 20% of the total supply. According to data from the Futures Daily, last year the actual effective production capacity of PTA was approximately 48.98 million tons ； Production was 44.7 million tons, while consumption was 45.02 million tons.
The oligopolistic pattern is intensifying; with another wave of overcapacity, the elimination of outdated production capacity will be inevitable. The previous round of PTA overcapacity occurred in 2015. According to data from Zhuochuang Information, from 2002 to 2014, China’s textile industry developed rapidly, with textile exports increasing year after year at an average annual growth rate of 14.27%. This has led to a continuous increase in the number of domestic polyester manufacturers. From 2001 to 2014, the average annual growth rate of domestic PTA capacity was 26.47%, far exceeding the growth rate of polyester capacity at 13.99%. By the end of 2014, the industry had a PTA capacity surplus of 4.3337 million tons. Subsequently, PTA prices continued to fall, leading to a significant reduction in corporate profits. According to the Futures Daily, between 2014 and 2015, 16 fiber manufacturing companies, including Cifu Group and Far East Petrochemical, went bankrupt one after another.
Sun Xuefei, a PTA analyst at Longzhong Information, also believes that currently, the power in the PTA industry chain is mainly in the hands of large enterprises. Small and medium-sized enterprises are at a competitive disadvantage with reduced room for survival, and the industry will inevitably undergo reshuffling to achieve a new balance between supply and demand. According to data from Dazhong Internal Insights, the PTA processing cost for Hengli Petrochemical’s new units is around 280–300 yuan per ton, while the processing cost for its older units is generally around 700 yuan per ton. During the period of overcapacity, the average processing fee in the industry may be reduced to 300–500 yuan per ton. Older facilities will essentially operate at a loss, while larger new facilities can still achieve profits of up to 200 yuan per ton. By then, older plants or those lacking a complete industrial supply chain will be forced to shut down frequently, or they will be driven out of the market by larger new plants, resulting in a more concentrated share of production capacity among the leading companies. According to the Futures Daily, the PTA industry is currently characterized by an oligopolistic structure, with the top three companies being Yisheng Petrochemical, Hengli Petrochemical, and Fuhua Fuhai Chuang. The PTA production capacity of these three companies accounts for half of the industry’s total capacity, giving them absolute influence in the sector.
The Belt and Road Initiative doesn’t have a market of this size either