Why does China PET bottle chip industry run decline continuosly in the peak season ?

Recently, PET bottle chip prices have shown a tendency towards weakness. On one hand, the support from upstream raw material costs is not strong enough. On the other hand, sea freight rates continue to rise, coupled with a shortage of shipping containers. Post the May Day holiday, some PET bottle chip factories have experienced partial hindrances in export shipments, and the pickup speed by some downstream customers has slightly decreased. However, after prices fell below the 7000yuan/mt mark, downstream major factories have started replenishing stocks one after another. It is reported that many downstream major factories have already made purchases until August. Though current processing spread of PET bottle chip is still around 550yuan/mt, in terms of bulk deals since May, the actual processing spread is around 450yuan/mt. Will the O/R of PET bottle chip factories continue to decrease in the future?

According to CCFGroup statistics, Chongqing Wankai, Sichuan Hanjiang, and CRC Jiangyin have taken actions to reduce or halt production, involving a total capacity of 1.5 million tons. Combined with previous long term shutdown and capacity conversions of about 1 million tons, the current idle capacity totals around 2.5 million tons, affecting the operating rate by approximately 13.8%. Additionally, some PET bottle chip units have not reached full capacity run, accounting for around 4 percentage points. As of last Friday, based on a designed capacity of 18.13 million tons, the average operating rate of domestic PET bottle chip factories has dropped to around 84.3%, a decrease of about 12.3% from the peak in April.

From what we understand, most of these idle capacity are mainly due to external or unexpected factors such as raw material supply, equipment malfunctions and financial issues etc., rather than being actively shut down. At the same time, from CCFGroup perspective, mainstream PET bottle chip factories are currently prioritizing market share retention (as actual downstream purchases are still growing), even if they incur losses for a period. Due to considerations like continuous equipment operation and labor issues, most bottle chip factories are persisting in normal operations.

We believe that it is rare to see significant production cuts in PET bottle chip factories around the summer months. Based on years of data tracking, in normal years, the lowest operating rate tends to occur around September to November, when major beverage factories intensively underwent annual maintenance. In very few years, the low point occurs around the Chinese New Year period. Around June to August, as beverage factories are in peak consumption season, there is a high overall demand for PET shipments. Moreover, maintenance of units also requires certain costs and time. Therefore, unless under extreme circumstances, PET bottle chip factories generally do not easily consider halting production.

The biggest challenge currently facing the PET bottle chip industry comes from new capacities launch. Starting from the end of May, a total of 4.2 million tons of new capacities from Yisheng Dalian, Yisheng Hainan, Sichuan Hanjiang, Sanfame and Sinopec Yizheng are expected to be gradually put into operation. Considering that by the end of the second quarter and in the third quarter, most units have already finished construction, and the timing of production commencement mainly depends on the factories' market forecasts and control. Therefore, the actual new capacity is not expected to deviate significantly.

Certainly, the substantial influx of new capacities will inevitably exert a certain pressure on the market sentiment, further compressing the processing spread. We predict that the initial approach will focus on replacing old with new capacities, followed by gradually phasing out other units. Therefore, there is a higher probability that the operating rate of PET bottle chip factories will undergo fluctuations in the third quarter. In addition, by 2025, Fuhai, Sinopec Yizheng and Tiansheng still have capacity expansion plans to be noted, but the overall planned new capacity has significantly decreased compared to 2023 and 2024.

Currently, maintaining the operating rate of PET bottle chip at the current level in the short term is not a major issue, coupled with expectations of new capacity additions in the future. As for the summer pickup speed, although downstream beverage factories have high operating rates, the overall pickup speed post the May Day holiday has been average, without any urgent demands for shipments given to bottle chip factories. Therefore, the pickup speed in the subsequent period will need to be observed for some time. Additionally, there has been no significant increase in operating rates in edible oil factories, and the PET sheet factories continue to perform steadily, leading to evident inventory pressures among traders. Hence, the performance of end-user pickups in the future might be the key factor determining whether there will be significant fluctuations in the operating rate of PET bottle chip factories.