Polyester industry facing challenges, 25% production cut really matters?

Four polyester companies with total capacity at 23.57 million tons of capacity were heard to decide to cut production by 25%, which may affect 8.8 percentage points of polyester polymerization rate. As a result, 400kt/month of PTA and hundreds kilo tons of MEG demand is estimated to be impacted. All players on polyester market seemed to wait for this news yesterday. However, polyester companies still do not make the final decision by now.

March polyester market witnessed a “magic” environment.

Firstly, the Russia-Ukraine conflict completely changed market pattern abroad. The energy pattern has altered fundamentally. High crude oil prices impacted demand. According to the recent actions of the NATO, such situation may sustain long.

Secondly, weak demand was a common problem for various industries. There were many reasons for inadequate demand. For March, the spread of pandemic was an important factor. Many apparel wholesaler markets were closed in China due to the pandemic. Consumption obviously cooled down. Grey fabrics producers and printing and dyeing plants saw slow delivery and ongoing poor orders.  

However, the stocks and operating rate were high on polyester market. Participants paid much attention to whether polyester enterprises will scale down output.

By convention, supply and demand pattern will change if there is a big production curtailment, which will also impact market tempo.

Will it be the same this time?

Simply looking at the operation status, polyester plants have witnessed very high stocks. PSF and PFY producers have seen more apparent losses. It seemed that production reduction becomes more needed. Factories will finally make the decision: whether they will cut production and the specific reduction range. Here, let’s discuss one problem:

 What can production curtailment change?

Previously, polyester enterprises would cut production to protect price when the raw material market saw stronger price and higher profit or downstream demand was steady.

However, the picture was different in 2022.

Price of raw materials was not strong compared with polyester products, which was even weak, in fact, pressed by futures. Actually, it was oil market that dampen the whole industry.

Downstream plants are inactive in purchasing raw materials. It is because they face insufficient orders and stifled sales, not because they are waiting for polyester plants to slash price with high inventory. Thus, the contradiction was not between polyester plants and downstream producer but the real demand on terminal market. 

Therefore, current contradiction is on oil market and terminal market. Market players are powerless in this respect.

Production curtailment will mitigate inventory burden and slightly change the inventory structure on the market, but the effect on price tempo may remain limited.

The root cause of mounting inventory is not high operating rate but the greatly volatile price and ongoing subdued demand. Market status is expected to be not like now as long as demand is slightly better.

In fact, current polyester polymerization rate could not be described as high since 2020. Polyester production saw negative growth in Sep-Dec, 2021, and the increase in Jan-Mar, 2022 was not high.

Market players are waiting for the news of production curtailment on polyester market. The spread of pandemic and regional conflict outside China are also key factors noteworthy. We expect mid-Apr will be a crucial time for polyester companies and downstream plants deciding whether to cut output in a large scale. The whole market will recover only when the spread of pandemic is controlled, which may be in May.