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Insight | Time: Mar 9 2020 3:29PM
Oil plunges, price reduction of polyester products has a long way to go
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2020 is an unusual year. Sales of polyester products were largely plain in Feb after operation resumed, but actual transactions were scarce. The polyester polymerization rate declined to historic low, below 60%. Operating rate of downstream market rose to 50-60% by early-Mar and that of polymerization rate ascended to above 70%. However, plunging crude oil price greatly impacted the whole industry just when market players expected supply/demand to improve.

The Middle East stock market dropped sharply and commodity prices moved down with the plunge in oil prices as OPEC+ failed to reach an output cut deal. WTI dove around 28% and Brent saw the lowest below $32/b after opening in Asian hours this morning. It is hard to predict the bottom during plunge, and some participants expected oil price to be $20. Price of the whole polyester industrial chain will be affected by the collapsing cost.

Based on the historic data, price of Brent crude oil once decreased to below $30 in early-2016. Price of oil started falling in 2014, moved down again after rallied in the first half of 2015, dipped substantially in early-2016, and gradually rebounded.

Price of crude oil collapsed again at the beginning of 2020 amid meager demand affected by the COVID-19 outbreak. Saudi Arabia began slashing price, worsening the sluggish market. If price of Brent crude oil rises to $30/bbl, namely up to the lowest during last round. Price of Brent crude oil was around $45/bbl, so the decrement was $15, which meant the polyester cost having more than 700yuan/mt of reduction space.

However, the industrial pattern has changed as processing fee of upstream feedstock has been obviously shrank. The PX-naphtha spread was around $350 in early-2016, which has been near $250 now. If crude oil price consolidates at low level, the price of products on the whole industrial chain is likely to breach earlier low.

The price spread of naphtha also narrowed recently. Some naphtha from Europe was delivered to Asia with bigger arbitrage between Asian and European naphtha. Supply of naphtha increased. As for demand, demand for petrochemical products remained bleak, and some crackers faced pressure to cut run rate. The explosion of LOTTE South Korea intensified the supply/demand contradiction. The price spread of naphtha rapidly widened after the Arabia attack in Sep 2019, peaked in Nov 2019 and is keeping shrinking. According to the current level, a shrinkage of $20 is still possible.

Except for the price war, weaker demand was also a crucial factor for falling crude oil price. There were almost no transactions in Feb, and the recovery requires time. Demand is the final test after trading restored. All these factors also weighed on price.

If price of Brent crude oil sustains near $30/bbl and the spread between crude oil and naphtha shrinks to $30-40, coupled with the adjusting range of different products, price decrement of PFY may be near 1,000yuan/mt. Such assumption has premise that oil price continues consolidating at low level and reduction of different products is in place. There are many high-cost inventory, greatly affecting market sentiment. The decrement of different products is not expected to be completely synchronized with their own supply and demand feature.
[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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