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January 07, 2019

Booming Chinese Polyester Demand Continues to Drive the Global Industry

2018 continued the trends established in 2017.  Strong growth in the fibre sector in Asia outweighed all other influences on feedstocks, ensuring tight markets for PTA and MEG.  PET bottle grade resin demand continued moderate growth in most developed regions, but the main market effect was the very limited new capacity addition, and indeed some outages due to the insolvency of JBF RAK and M&G.  Several producers continued to post record profits through 2018.  Due to factors such as global internet-based retail of low price garments, and continued innovation in fibre performance, the PET fibre market has continued to grow at rates which seemed impossible only a few years ago.  Despite already occupying around three quarters of the global market, the Chinese market continues to drive global growth, outpacing almost all other regions, and achieving average growth of around ten percent over 2017 and 2018.  The effect on feedstocks was increased by the ban on imports of RPET from other regions, which left Chinese recyclers short of post-consumer PET to recycle, and RPET fibre production was therefore replaced by virgin PET fibre.

The trend of back integration continued through 2018.  The global leading PET resin producer Indorama has continued back integration via acquisitions, right back through the value to para-xylene and ethylene.  This strategy proved its worth in 2018, as these assets provided considerable competitive advantage over rival PET producers which were afflicted by major PTA supply outages in Europe, North America and South Korea. 

A greater factor over the coming years will however be the back-integration by the major PET resin and fibre producing groups in China.  These operators have come to dominate global fibre production, and particularly the global export markets for fibre and PET resin, despite the immense shortage of both MEG and para-xylene in China.  Imports of para-xylene have risen to over one million tons per month, and have prompted a wave of investment in “Crude-to-PX” complexes, which are essentially refineries configured to produce maximum aromatics.  Some are going a stage further, building large steam crackers and very large MEG plants.  The effect will be to significantly enhance Chinese competitiveness in PET resin, fibre and film.  The Chinese PTA market has become relatively tight, and despite another five million tons per year of new capacity announced in late 2018, demand in China looks strong enough to avert large-scale PTA exports over the coming years.  Another surge in Chinese PET resin capacity will however renew the competitive pressure globally.

Societal trends have come to the fore, but have limited scope to affect the PET market from a global perspective at least.  The global concern over plastics in the environment has led to call for increased recycling, but PET is already more widely recycled than alternative polymers materials, and has a generally favourable environmental profile relative to aluminium or glass.  The proposed ban on all single-use plastics in India already includes derogation for the PET industry to continue unchanged.  Global concern over the health effects of sugar consumption has led to the imposition of taxes on sugary drinks in several countries.  The main effect has however been for an acceleration of the shift from carbonated soft drinks to bottled water and other healthier alternatives, and the effect has not seriously impacted on the industry globally.

Although the barriers to entry into the PET market are much lower than for most other polymers, it remains a high risk option for new market entrants.  The spectacular rise of Indorama Ventures to become the world’s largest PET producer has partly been achieved by the acquisition of distressed assets, including several new plants whose sponsors ran into financial difficulties during the construction and commissioning phases. 

The surge in demand in China, and major production outages in some other key producing regions led to a sharp increase in PTA margins in 2018, and access to PTA again became a significant factor regarding competitive advantage downstream.  Producers in regions such as Western Europe were positioning for an increase in contract margins for 2019 as a result. 

PTA producers in countries such as South Korea and Thailand were able to achieve near maximum utilisation rates in 2018 as a result of stronger demand.  Efforts by European players to obtain anti-dumping duties against South Korean imports did not succeed, with the European Commission finding that the sales prices into Europe were not below fair value.  Efforts to exclude the majority of PET exporters into the US market were also unsuccessful, as despite finding that the most of the suppliers concerned were dumping, the US International Trade Commission also found that there was no harm to local suppliers as a result.

The surge in fibre production drove a significant recovery in MEG imports over 2017, following the sharp drop in 2016.  The construction of numerous coal/oxalate process MEG plants in China failed to make a significant impact on the market in previous years as the plants were unable to run at high rates, or produce MEG of sufficient purity to be used in the production of PET.  New catalysts were widely adopted in 2016 however, allowing several of the plants to run at close to full capacity, and produce mostly prime (fibre) grade MEG.  The result was a drop in China’s MEG imports of over 1.5 million tons in 2016, and significant erosion of margins.  The propensity of Chinese companies to invest in coal based chemicals, and the polyester industry is enormous, and several new plants were commissioned in 2017, and more new projects initiated.  The construction of these plants is now very quick, averaging around two years, and some companies are planning complexes with over one million tons per year of MEG capacity.

The forecast includes further growth in coal-based MEG in China, to reach around eight million tons per year by 2030.  The coal/oxalate technology remains limited by small line sizes, restricted by the existence of an explosive intermediate which caused a major incident at the first plant which was commissioned in China.  Further process advances, particularly in controlling this risk to enable larger line sizes could feasibly allow a much more rapid capacity build in China, potentially offsetting a much larger proportion of imports.  Conventional EO/MEG capacity development in China is also developing rapidly, with several new projects confirmed in 2018.  Capacity growth has slowed in the Middle East, but has increased in the United States.

The Chinese apparel market is of almost comparable size to that of the United States, and has provided a significant proportion of global fibre demand, growing at 15-20 percent per year.  This number has declined significantly over the past three years, but remains at around ten percent.  Higher wage rates in China have created some problems in the garment production industry, but support the growth in apparel spending necessary to drive China’s garment demand. 

The migration of textile and garment industry activities from China to countries with lower labour costs such as Vietnam and Bangladesh has slowed, but will remain a feature of the industry.  The withdrawal of the United States from the Trans Pacific Partnership announced by president-elect Trump effectively favours China, and reduces the growth outlook for fibre in countries such as Vietnam which were set to gain a significant duty advantage over China on garment exports into the United States.  Part of the fibre growth over 2017 and 2018 was due to fibre export, but most was driven by garment production for both local and export markets.

Demand growth for PET container resins has slowed in some key developing markets, but recovered in some of the larger and more mature Western markets in 2016, and remained relatively strong over 2017.  RPET has only remained viable in applications where brand owners have made a public commitment to use it.  Applications such as sheet for thermoforming have lost RPET content since it ceased to provide a cost advantage over virgin material.  The underlying supply of RPET bales continues to grow as the PET markets grow and governments pursue recycling and sustainability objectives.  Fibre production in Asia, which remains the most viable application for RPET has continued to grow, while RPET use declined in some developed regions over 2016.

The Chinese authorities announced a crackdown on imports of raw PET waste, and unauthorised recycling operations which are blamed for pollution in some areas.  The name given for the initiative translates roughly as “sharp sword at national border”.  While there was some panic early in 2017, the volume of import licences for RPET was eventually quite similar to that in 2016.  A major drop occurred in 2018 however.  There has been some opportunity to recycle PET in other regions and export clean flake to China.  The volume was however very small compared to volume previously imported into China, mainly because other regions have only a very small fraction of the recycling capacity which exists in China.  Global PET recycling has therefore declined in 2018.  In the longer term, progress towards fibre recycling is likely to provide a very large quantity or RPET, usually using chemical recycling processes which produce either the PET monomer BHET or PET feedstocks.

The trajectory of the PET industry in the Middle East has been brought into question since 2015.  Middle East producers benefit from low energy costs and advantaged MEG, but are frequently at a disadvantage on PTA and the logistical costs of supplying PET to other regions.  Higher PTA margins in 2018 have however reignited interest in a PTA plant in the Middle East.  While Middle Eastern PET producers have been able to defend a substantial share in the regional market and hold a significant share in Africa, their penetration into other markets has been difficult.  Export-based producers such as Octal in Oman lost business into Europe because of their loss of GSP status, and lost business into the United States as a result of anti-dumping duties, although sales into the US increased in 2018 due to tighness.  SABIC/Ibn Rushd has moved ahead with a large new PET plant, took a major asset write down, and appears to have stopped using its older plant.  The earlier plans to integrate with upstream developments via a large new PTA plant have not progressed due to the level of global PTA oversupply, and Ibn Rushd therefore sells para-xylene and purchases some of its PTA requirement, frequently from China.  The JBF RAK plant may return to operation at some point in future, but the main growth area for supply is Turkey where two relatively new plants are now operating.  Oman, Saudi Arabia or Turkey could become host to a major new PTA project.  The massive integrated PTA/PET project proposed by Pan-Asia PET in Saudi Arabia has not however showed visible signs of progress.

The Western European PET industry has enjoyed a renaissance since 2015, mainly due to the weakness of the Euro and the fall in energy prices which respectively mitigated the region’s high fixed costs and energy cost disadvantage relative to other regions.  Higher freight rates from Asia have afforded more protection to European producers, although the margin situation is still extremely challenging, and bankruptcies are frequent.  Higher energy prices over 2018 were mitigated by bankruptcy and feedstock supply issues in other regions which minimized the influence of PET imports in Europe.

PET bottle resin demand has been undermined by lightweighting in recent years, whereby improvements in design and processing have allowed producers to radically decrease bottle weights.  The lightweighting trend has now largely run its course in the developed markets, although this has been cited prematurely before, and bottle weights have continued to decrease.  PET has also been replaced with alternative materials such as paperboard cartons in key growth markets like China.  While suffering some competition from polypropylene, PET has been replacing HDPE in the packaging of milk and personal care products, due to its lower price and the variety of packaging options it provides.  PEF resin (polyethylene furanoate) has great potential in some large and small applications if its production and that of its feedstocks can be successfully scaled up.

Lower PET resin prices reduce the motivation for further lightweighting, increasing the payback period for the required investment in redesign and retooling.  Lightweighting, and the preference for discount beverages packaged in lighter bottles has partly been due to the ongoing economic hardship in many regions.  As several economies have shown a significant improvement since 2015, this also reduces the pressure on average bottle weights. 

 

Find out more in our latest report:

Market Analytics: Polyester and Intermediates - 2018

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