Purified Terephthalic Acid (PTA) is an important raw material in textile manufacture, and China has a stockpile of 3.8 million tons.
By XU Ning
Translated By GU Yiwei
Merely accelerated by the coronavirus pandemic, a shift in the supply-demand balance of Purified Terephthalic Acid (PTA) has been a long time coming. Now, with the domestic PTA reserves reached 3.79 million tons, the highest in five years and 1.79 million tons more than the year of 2015, the industry is on the threshold of another round of consolidation, both horizontal and vertical.
PTA is derived from crude oil and is the premier raw material for polyester. Around three-quarters of all polyester production is fibers that are subsequently woven into fabrics.
Although the pandemic has dampened demand for textiles, a unique combination of market factors convinced PTA makers to up production, resulting in the current oversupply. Long-awaited, this oversupply was not expected to materialize until later this year, when a huge new Hengli Petrochemical plant goes into production.
“The oversupply just happened sooner than we expected,” Qiu Jingjing, a commodity analyst, told Jiemian News. At the end of last year, the glut was predicted for the second half of the year, when a number of new production facilities, including Hengli’s, will bring an additional 10.5 million tons a year online.
An intermediate product, PTA is at the mercy of upstream suppliers and downstream users. In March, when crude oil prices plummeted, the cost of PTA production dropped correspondingly. As polyester manufacturers resume, the price of PTA has increased markedly from April’s 580 yuan (US$82) per ton to 730 yuan in May. This encouraged PTA manufacturers and by the end of April, the industry was operating at around 85 percent capacity.
Under the current price, most PTA makers will turn a profit, according to a Guangfa Bank report, but the market is very different now from two years ago. In 2017, China banned imports of plastic waste. Much of this waste was previously processed into polyester fiber. As that source of fibers vanished, demand for PTA grew accordingly. This, combined with a slow catch-up in production capacity caused PTA prices to surge, reaching 1,068 yuan per ton at the end of last year.
As factories shut down in January and February, quickly followed by paralysis of the export market, PTA stacked up. Yu Guoliang of Sinopec expects production to hit 50 million tons this year, 10 million tons more than the convalescent market needs.
Those new factories ready to start pumping out PTA were planned during the boom after the plastic waste import ban. The rapid expansion of the PTA industry is probably at an end, and a new phase of consolidation looms.
This will not be the first industry reshuffle. The last one was in 2015 after a ten-year golden age in the domestic textile industry when polyester production increased at around 14 percent each year. PTA capacity grew even faster and by the end of 2014, it was making 4 million tons more than the market could absorb each year. Mass bankruptcies followed. Prices collapsed. Small, outdated factories disappeared.
The next shake-up will be even more ruthless. Analysts tell Jiemian News that the market is “absolutely more favorable” to new plants producing more than 10 million tons a year, so long as they integrate refining and processing. New factories are more efficient and reliable. Production costs at the new Hengli plant run to around 300 yuan per ton, less than half what old factories pay, so they still make a profit, even in a weak market.
Small producers are squeezed out of the market, cannon fodder for the ongoing mass consolidation in petrochemicals. The market is already an oligopoly, dominated by Zhejiang Yisheng, Hengli, and Fujian Fuhaichuang, who together control about half the industry.
All three have expanded aggressively in the past year. In addition to the Hengli’s new works, Zhejiang Yisheng has spent 670 million yuan on a new production line to make 6 million tons each year. A company spokesperson said the company planned to “scale up its PTA capacity and boldly expand its market share.”
In an oversupplied market, some PTA producers got relentlessly bigger and stronger. They have survived and thrived by expanding vertically. Production is consolidated through acquisition of upstream suppliers or downstream producers. Hengli has expanded into crude oil refineries, doubling its profit last year. Others have moved into polyester and fabric production: Rongsheng saw its profits increase by 40 percent, partly due to a new, multi-function facility.
Li Feng on the board of Hengli believes production has not been disrupted much by the virus lockdown, as automated facilities are not heavily reliant on humans.
“We take orders and decide how much PTA to produce. So overall the company has been managing its inventory pretty well,” he said.
As smaller, older producers die off, this issue of oversupply begins to take care of itself. Another way to get rid of the surplus is to send it overseas.
According to Yu Guoliang of Sinopec, as textile production gravitates to cheap labor in Southeast Asia and Africa, China can export to countries with no established upstream petrochemical industry. In March, China exported more than 100,000 tons of PTA, the most ever and twice as much as last year, and things will only get better, or worse depending on your point of view.
According to Chem365, a commodity data provider, with another 20 million tons of annual capacity and low production costs, China will have significant advantages over their global peers as a new plastics landscape takes shape.
