Insight Focus
- Both PTA and MEG futures fell slightly by Friday’s close last week.
- PET resin export margins continue to recover, future new capacity to restrain further strength.
- Polyester raw material forward curve falls into slight backwardation into H1’24.
PTA Futures and Forward Curve
PTA futures slipped back last week, with the main Jan’24 contract dropping by around 1% on weaker upstream costs.
Crude oil prices fell around 3.5% through the week due to weaker than anticipated economic data out of China, indicating a potential deceleration in economic growth, based on July’s industrial production and retail sales figures.
Whilst there were some changes in PTA production, including reduced production at Ineos’s two PTA plants in Zhuhai due to hydrogen supply issues, the supply/demand situation remains relatively balanced.
The PX-PTA spread kept low, dipping below the USD 90/tonne mark briefly before recovering back to around USD 94/tonne by the end of the week. Even at these levels, losses are understood to be limited, with little indication PTA producers will seek to cut production imminently.
Polyester operating rates remained high supporting PTA demand, with the approaching traditional peak season expected to see increased textile and fibre sales keeping polyester production high.
By Friday the Jan’24 contract was trading at a RMB 72/tonne discount to the current month.
MEG Futures and Forward Curve
MEG Futures fell sharply last week, with main month contracts dropping 1.5-1.9%, as import arrivals push inventory levels higher.
Main port inventories increased by 4.1% last week to 1,055k tonnes, and still set to climb higher. Market participants are anticipating import will continue to flood in through August.
Peak polyester season is rapidly approaching; from late-Aug to October consumption of port inventory is expected to increase, with import arrivals easing from late-Sept.
Given the continued weakness in the polyester export market, the MEG market may see a repeat of last year’s lack of seasonality, keeping port inventories stubbornly high in the coming months. Post-peak season expect MEG to move into greater oversupply.
Despite the potential downside, the MEG forward curve remains in contango over the next 12-months. By Friday the Jan’24 contract was holding a RMB 114/tonne premium to the current month.
PET Resin Export – Raw Material Spread and Forward Curve
Chinese PET resin export prices eased last week closing on Friday at 880USD/tonne, a 15 USD/tonne decrease on the week before.
The weekly PET resin physical differential to future feedstock costs edged further upwards to 17USD/tonne by Friday, a 2USD/tonne improvement from the prior week.
At Friday’s close, feedstock costs were down almost 2% on the week before, closing at 863USD/tonne.
The raw material cost forward curve fell slightly across all contracts until at least July’24, as H1’24 prices come under more pressure. As such the curve has become more backwardated.
Concluding Thoughts
Despite the latest weakness in the crude market, analysts still foresee a tightening market ahead with minimal downside risks if OPEC+ keeps production levels controlled.
This assessment supports a continued view of higher crude prices towards year end, in turn lifting raw material costs for polyester producers.
Whilst the physical differential between future raw materials and PET resin exports remains close to historic lows, large plant sizes, greater downstream integration, and discounted oil supplies, means cost of production is also lower.
Domestic processing spreads of about RMB 600/tonne are acceptable by the plants; current spread is around RMB 680/tonne. Whilst export margins are lower, total sales likely remain profitable.
That said further downside is expected to be limited, and prices are expected to track a relatively flat raw materials forward curve through to year-end.
However, this may be put to the test with the next of a slew of new capacity additions, starting with Billion’s new 600kta plant, which is expected to begin production in the next 7 ~ 14 days.
For PET hedging enquiries, please contact the risk management desk at MKirby@czarnikow.com.
For research and analysis questions, please get in touch with GLamb@czarnikow.com.
