Will polyester market have chance to warm up?

Pessimism pervaded late-Oct while stock market and commodities market had a good start in Nov, rarely bringing a little warm to the cold and cheerless market. Of course, most market players are still cautious about the future, but it still can't help thinking: Is there any possibility of getting warmer?

From the perspective of the industry, it has been mentioned before that the upstream capacity will still be put into operation, the downstream demand will gradually weaken, and the trend of price difference compression may continue, which is only a matter of time schedule. But this time, let's take a look at the macro logic, whether it is possible to guide the cost or ease the mentality slightly, and then have a little impact on the rhythm of the market.

Price of crude oil tended to stop falling and rebound from end-Sep and was largely stable.

The logic of the oil price rebound could be explained in two ways: falling US dollar index and growing seasonal demand.

US dollar index trend

From mid-Oct, when the US inflation data exceeded expectations again, but the dollar index fell instead of rising, the market slowly began to feel that the direction had changed a little.

There is more and more news that the path of the Fed to raise interest rates next year may slow down. In terms of mechanism, there are several explanations:

1. Although the employment data is still strong, the slowdown in economic data is becoming more and more obvious. The latest PMI data showed that the US economy may be close to stagnation.

2. From the policy of raising interest rates to the decline of inflation, from the formulation of the policy to the appearance of the effect, it may require a lag period. After continuously raising interest rates, it needs to wait for a period of time. After observing the economic data, the follow-up policies will be further evaluated.

3. The continuous interest rate increase leads to the higher risk of financial market. In addition to the collapse of stock and bond market, the joint effect may cause systemic risk. Among them, the pension problem in Britain has sounded the alarm bell, which shows the fragility of financial system.

At the same time, Britain has begun to take the initiative to start QT (quantitative tightening), the euro zone has vowed to continue raising interest rates, which dampened the dollar index to a certain extent.

But with the Federal Reserve meeting on Nov 1-2, the market tone changed again. Inflation trend continues to be obvious. The media comments have turned to strengthen interest rates. Before the Federal Reserve interest rate resolution announced on Nov 3, the dollar index showed a rebound again.

From the trend point of view, the initial signs of the weakening US dollar index have appeared, but the change needs longer time to be confirmed repeatedly, especially under the complex situation of continuous rising inflation pressure. It may have a big possibility to see repeated shocks.  At present, the rhythm problem is more important for market players. As long as it is not a strong pull back to exceed the expected rate rise rhythm, the short-term market may still be in a neutral-to-warm atmosphere.

Of course, political variables are also critical.  Biden's mid-term election this year is seen as closely linked to the policy of raising interest rates, and Nov 8 is approaching, with Biden's poll ratings falling to 39%. After the mid-term election, whether the market will change is also a more important factor.

Seasonal demand

The logic of heating oil is about seasonal demand for energy. It is generally believed that there are two waves of seasonal demand for crude oil, one is gasoline demand corresponding to summer travel and the other is fuel oil demand corresponding to winter heating. Led by the seasonal demand for gasoline in the second quarter, the crude oil price was once pushed up continuously, and by the middle of Jun, as the demand fell short of expectations, the oil price also began to peak at a high level and started slow downtrend.

Since the end of Sep, Nord stream 1 and 2 pipes leaked, and since then the heating logic has gradually begun to show signs. Although the price of natural gas has been falling recently (but natural gas involves complex factors, such as restocking in advance, rising temperatures, political factors, etc.), the price of crude oil was not too strong. But the price difference between the cracking price of heating oil has indeed rose significantly (or even higher than the previous high). So what is the internal logic of mounting? It is the seasonal demand.

If the repression of US dollar is turned on, then the political factors (mid-term elections become the point of time) are removed, is there any possibility of further strengthening in the future? In addition, this winter's temperature is also an important variable, and it may still be too early to say whether it is cold or warm.

The overseas market has been warming up at the end of October, and the factors affecting the industry in the near future are mainly in China. Uncertainty in the control of the epidemic suppresses the performance of commodities and the stock market, and recent trend has also become a crucial factor affecting market sentiment. If the domestic cautious attitude relaxed and overseas market maintains a warm atmosphere, then the market may be supported longer.

In fact, writing this article is not about how optimistic about the future, the problems that the industry face are still insurmountable. It is just to follow up more relevant variables to see if the market is likely to turn better. Or there are some rhythmic changes.

Diversified tempo on polyester market 

PET bottle chip market shrank the fastest. Domestic and export trading atmosphere cooled down in Sep and Oct, dragging down the price spread of PET bottle chip. However, after the absolute price continued falling, buying interest started improving. Some big downstream factories intensively restocked from last week, for the Q1-Q3 of 2023.

The profit of PFY has touched bottom in Apr and was meager on the whole despite of some fluctuations. Therefore, PFY companies kept running at low capacity in Oct when PSF companies raised run rate and PET bottle chip factories ran at high capacity, while the news of production curtailment continued emerging. In addition, PFY companies faced high inventory this year. The inventory was greatly depreciated when crude oil price dived in Q3.

PSF producers saw relatively better profit and the price of PSF was more resilient than that of PFY. The operating rate of PSF companies was stronger. However, it was not because downstream market of PSF performed well but because PSF plants scaled down output in advance this year. The production of PSF decreased more than other polyester products in the first half of 2022. In fact, PSF companies faced lower inventory burden than PFY manufacturers. The profit of PSF increased recently with rapidly decreasing feedstock price, while PSF plants may focus on selling later and the price will be negotiable.

In general, the profit or price spread of polyester products has touched or is near the new low in recent two years now.

Will the price spread continue being compressed? It may tend to shrink.

The price of feedstock is likely to reduce, while it is hard to say the specific time. After all, new units have not confirmed the startup time.

As for the polyester products, the spread may have small downward space. The price spread of some products may hit new low as some companies may choose to discount price for promotion, and they may even shut down for turnaround.