Polyester industry chain: is demand recovery a real driver or a false proposition?

Recently, market observers have looked to PTA as the main support for whether the polyester industry chain can bottom out and stabilize. However, this is only based on the implementation of PTA plants maintenance and expectations of downstream polymerization rate increase. In actual physical markets, end-user customers have not shown obvious purchasing interest, mostly were improved sales brought by polyester manufacturers' promotions. For example, end Apr early May, end-user plants consecutively built stock as PET price declined. PFY sales ratio didn't increase until factories promoted sales. Thus, the expected new round of price rise has not arrived, and the market sentiment continues to be flat.

PFY sales ratio

So, will the market price of polyester products continue to fall? We don't believe it will be so pessimistic. In 2023, end-user demand and operating conditions are actually improving year-on-year, and prices throughout the polyester industry chain are at a relatively low historical level. The probability of a significant continued squeeze is not very high. We can compare the inventory and operating rate of some products graphically. In actual comparison, there is a significant recovery in year-on-year and month-on-month operating conditions for processing links such as weaving, twisting, grey fabric, printing and dyeing.

 O/R comparison of end-user sectors

So what are the reasons why many people believe that demand is not good? After communicating with multiple parties, we believe that the main reasons are as follows:

1. The industry is more competitive, resulting in more intense price competition. On the one hand, industry supply is rapidly growing, and companies are eager to expand their market share in the golden period after the epidemic, reducing costs to compete for more orders may be the first strategy that many companies think of; on the other hand, the demand side is lagging behind in keeping up with the pace, disrupting replenishment cycles. Therefore, the so-called poor demand in the market is actually due to the fact that everyone is scrambling for orders, and the selling price of orders mostly does not meet the original expectations. Downstream end customers are not in a hurry and have gradually transformed their mentality from buying high to buying low. The contradiction between market digestion of accumulated inventory from last year's channel and the upstream manufacturers' urgent need to achieve rapid year-on-year output growth has widened, which has brought great pressure to some enterprises with weak competitiveness and not-so-obvious cost advantages.

2. Is it feasible to rely on exports for help? While Chinese people are hoping for an increase in overseas orders, foreigners are also hoping to take advantage of China's opening up and economic take-off for their own economic recovery. However, the market eventually found that things were not going so well. PET bottle chip accounts for about 40% of the main PET products exported. Taking PET bottle chip exports as an example, the shipment volume from January to April has achieved rapid year-on-year growth, but the situation of new orders is not satisfactory. Once the orders in foreign trade are reduced, this part of the indicators will inevitably be transferred to the domestic sales level, and the actual result has already been seen in the current market. In addition to a few PET bottle chip factories with slightly tight shipments, inventory in other factories is either rising or at least there is stock available for domestic sales in the near term.

Overall, the downstream demand in the polyester industry chain is indeed recovering, but the performance in overseas markets is not as good as expected and has not brought strong support to domestic sales. At the same time, manufacturers had strong expectations for recovery at the beginning of the year, but the reality is that demand and consumption are slow to catch up, and the market sentiment is difficult to change significantly in the short term after breaking expectations. Therefore, we believe that there are two estimates for the future market: first, the O/R of polyester factories will inevitably remain high, mainly due to considerations of mid-year financial report data and the insistence of some large factories on maintaining market share; second, if there are significant fluctuations in the future market, the main driver will still come from the raw material side, especially the game between new PX and PTA new capacity expansion and maintenance. It may still take some time for the downstream to recover, especially in terms of market confidence and the mindset of purchasers.