Purified terephthalic acid and monoethylene glycol margins are likely to remain depressed until the end of the first quarter this year, based on a weak short-term outlook for the downstream polyester market, industry sources said this week.
Ongoing concerns over economic growth and a reduction in cash flow liquidity have forced several polyester plants in the key China market to cut runs -- sharply pulling down demand for both PTA and MEG feedstocks in the process.
Demand took a further hit, with the absence of Chinese buyers over the Lunar New Year holidays that started in late January.
These had progressively pushed PTA margins into deep negative territory, to be currently valued at $36/mt below breakeven cost, based on a PX price of $1,310/mt CFR Taiwan plus a conversion cost of around $120/mt -- down sharply by $102/mt from January 2.
In contrast, margins were $66/mt above breakeven cost at the start of the year, based on a PX price of $1,423/mt CFR Taiwan/China and PTA at $1,000/mt CFR China.
MEG margins meanwhile, have been persistently in the reds since the start of the year, as tight supplies have kept feedstock ethylene costs high, while downstream demand was weak.
Asian ethylene spot prices were assessed at $1,470/mt CFR Northeast Asia Thursday. Based on a conversion factor of 0.6 and production cost of $150/mt, MEG makers are currently incurring negative margins of $29/mt.
HIGH INVENTORIES TO ENCUMBER DEMAND RECOVERY
But even if Chinese buyers do return to the market with renewed appetites after the Lunar New Year holidays, it would take time for the downstream polyester plants to restart, and to digest the current high stocks of both PTA and MEG, industry sources said.
"The Chinese market will recover [after the holidays] but not so sharply," said a PTA producer. "It will take at least a month and filament inventories are particularly high as well."
"Run rates of the polyester plants in main market China are around 20% capacity at present, far lower than last year," a trader said Wednesday.
Another source estimated that around 50% of all Chinese polyester factories had shuttered during the Lunar New Year season because of weak demand and high inventories.
MEG inventories have been building up amid weak downstream demand. Stocks in East China were estimated at close to 1 million just before Lunar New Year in late January. This is 33% higher than the typical level of around 750,000 mt.
PTA stocks were estimated at around 1.8 million-2 million mt in East China, or 80-100% above the normal average level of 1 million mt, market sources noted.
Separately, the weak downstream PX, PTA and polyester chains have narrowed the PX-MX spread, with no upside seen in the short term due to delays in the startup of new PX plants in South Korea and India.
The PX-MX spread on an FOB Korea basis had hit its narrowest in more than three years on January 30, at $139/mt, Platts data showed. It was last lower on October 7, 2010, at $134.50/mt.
Typically, PX producers require a minimum $230/mt spread between PX and MX in order to breakeven.
