H2 2021 PETROCHEMICALS: Asian PTA faces supply glut amid Chinese expansion, uncertain demand

Market sentiment is generally bearish for the Asian purified terephthalic acid, or PTA, market due to new capacity expansions in China lined up towards the second half of 2021 -- which is putting pressure on both domestic and international prices -- and an uncertain demand outlook.

The demand outlook for H2 remains unclear amid new waves of the coronavirus infection in Asia, especially in India, with bottlenecks created by global logistics challenges arising from container shortages.

Despite the bearish PTA outlook, some market players are pinning their hopes on potential run-rate adjustments and capacity normalizations in China, while the effective vaccine rollout may control the pandemic and create some price support in H2.

China's mega expansion weight on profits

A total of 6.6 million mt/year new PTA capacity is expected to come online in China in H2. China's Yisheng Petrochemical will operate the two new PTA lines which have a capacity of 3.3 million mt/year each, with one unit expected to start in July, while the other may come online around end-2021, sources close to the company said.

This is in addition to 4.9 million mt/year new Chinese PTA capacity added in the first quarter of 2021, and earlier expansion of 7.2 million mt/year in 2020.

Such intensive expansion dragged Chinese PTA profit margins into negative territory towards end-2020 and will likely persist in H2, sources said.

The PTA/PX spread averaged around Yuan 335/mt (around $52/mt) from January to May 12 for China domestic PTA cargoes, below the typical Yuan 500-700/mt breakeven level, Platts data showed.

The PTA/PX spread averaged around $93.66/mt for dollar-denominated cargoes over the same period, with dollar-denominated PTA prices partially supported by international supply tightness outside China in early 2021. Although this spread is near the typical breakeven level for Asian PTA producers, the expensive co-feedstock cost of acetic acid has put pressure on many manufacturers.

PTA profit margins are generally on a downtrend, which is likely to be further squeezed in H2, though it could improve occasionally with shifts in short-term demand-supply fundamentals, a China-based PTA producer said.

Although there is a lack of fundamental price support for PTA, the absolute price movement depends on upstream paraxylene and oil prices in H2, a trader said.

Trade participants hope the overall Chinese PTA operation rate will either be adjusted lower or less competitive plants will be shut, after which the industry can cope with the mega expansion and squeezed profit margins.

However, capacity rationalization is a longer-term phenomenon and is unlikely to create a large-scale change in production in H2, sources said. A total of around 4 million mt/year Chinese PTA capacity has been shut since end-2020 due to various reasons and is likely to remain shut in the near future, they added.

Market eyes Indian demand, China's exports

Trade participants are closely monitoring Indian demand amid the second wave of the coronavirus pandemic, since India became the biggest Asian PTA importer around end-2020 after China achieved self-sufficiency.

In India, the timeline for demand recovery along the polyester chain is unclear, although market participants hope that the COVID-19 situation will improve around mid-June.

Normalization of trade activity and demand recovery may slip into H2 even if COVID-19 cases reduce in response to stringent lockdowns by Indian states, sources said.

India's new wave of the infection has disrupted supply chains and manpower availability, and even though the manufacturing sector has been allowed to operate during the lockdown, it may take some time for the country to get back on track.

Indian domestic PTA supply is expected to tighten once the demand revives in H2, sources said. This could lead to import demand within India, but unavailability of containers and expensive freight are likely to dampen that demand.

Besides the uncertain demand from India, the outlook for Asian PTA highly depends on the progress of China's new PTA startups, potential capacity rationalization and how much China plans to export in H2 2021, two Asia-based producers said.

China's PTA exports hit consecutive records in February and March at 196,592 mt and 338,675 mt, respectively, much higher than the monthly average of 70,565 mt in 2020, China customs data showed.

Global PTA markets are projected to remain oversupplied throughout 2021, leading to prices falling closer to just breakeven levels. Summer demand might provide support from PET sector, however, the polyester chain is only expected to reach peak demand in Q4," Platts Analytics said. "Globally about 30% of PTA is consumed by PET while fibers constituent 65%."

It is not easy to compete with competitively priced Chinese PTA cargoes for exports unless there are freight and tax advantages, a manufacturer said.

In the rest of Asia, South Korean PTA exporters will continue to target the European and Turkish markets, capitalizing on advantages of their Free Trade Agreements with these countries, while Taiwanese producers are actively exploring options to diversify exports.