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Insight | Time: May 15 2019 10:16AM
Polymerization rate expected to decrease further
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The polymerization rate has started falling in early-May, down to current 91% from 93.8% at the beginning of May, and some plants will have scheduled production cut or turnaround in later period. Actually, some other plants consider to scale down production or have maintenance. Such situation renders market players recalling the market status in the third quarter of 2018.

The polymerization rate is expected to decline and the specific logic and process evaluation is worthy probing into.

Generally, the similarities of these two round include: strong PTA and bigger PTA-PX spread; shrinking profit of polyester products and even losses, and high stocks. The PTA processing gap enlarged as high as around 2,300yuan/mt in Q3 last year, and current disparity is around 2,000yuan/mt. Intensified Sino-US trade conflict is also a similarity, but it is complicated, which will be not analyzed here temporarily.

However, current situation that polyester plants face has difference compared with last round.

Squeezing profit of polyester products during last year was mainly from the snatch of strong cost (destroying industry balance), while this round of shrinkage is mainly because the surrender of part profit of polyester plants to downstream market (but the effect is not apparent).

In the third quarter of 2018, PX and PTA price surged, directly leading to the profit reduction in polyester market and downstream market, further impairing the placement of orders and finally causing big-scale production suspension in end-user market.

However, in 2019, polyester plants did not see poor profit before mid-Apr, but polyester plants started discounting from mid-Apr amid inventory burden and the worry toward May Day holiday, so price rapidly declined to cost line.

Thus, the rapid profit shrinkage in polyester plants was not completely caused by surging PTA market, but largely because polyester plants slashed price with modest demand and bigger inventory burden.

Plunging PX cost and pessimistic view toward market trend is also one of the reasons although PTA market remains firm.

All in all, leave aside the cost factors like PX, the dominant reason is subdued demand:

On one hand, meager downstream demand is not supportive to long-term firmness on feedstock market, and feedstock cost still has downward room; on the other hand, falling feedstock does not bound to solve problem. If downstream demand fails to improve, polyester plants will still slash run rate.

Polymerization rate is anticipated to reduce, but it may not decrease as rapid as the third quarter of last year, and the continuity may be longer than last year.

As for stocks, there is no absolute standard to evaluate whether the stocks are high or not. Current stocks have hit yearly high, but do not touch historic high. In addition, high stocks in some time is not horrible. For example, periodical high inventory caused by shrinking feedstock procurement will rapidly ease after market stabilized and the reallocate of profit, but if demand starts apparently losing vitality, this process may be longer. Inventory burden is supposed to heighten in short run, and polyester plants have to balance run rate, profit and inventory for a period.

It is learned that some PFY, PSF, PET fiber chip and PET bottle chip plants in Zhejiang, Jiangsu and Fujian have planned to scale down output or have turnaround, and some have carried out. Whether the actual implementation will exceed anticipation or not will be closed concerned.

Except for the situation of polyester market, recent market environment becomes more intricate. In view of the industrial factor, supply pressure on PX market has continued appearing, and the supply/demand assessment of polyester feedstock still should be followed up. As for macro environment, the fluctuation of RMB resulted from trade dispute and its influence to demand and mindset are variates should not be neglected during actual operation.
[RISK DISCLAIMER] All opinions, news, analysis, prices or other information contained on this report is provided by analyst of Zhejiang Huarui Information Consulting Co., Ltd (CCFGroup) as general market commentary and does not constitute investment advice. CCFGroup will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
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