Indian Polyester Industry An Attractive Space?
Polyester consumption is on the rise globally. Polyester's qualities & price make it an ideal substitute for other natural fibers like cotton. The share of polyester and other synthetic textiles in global textiles is rising and is expected to continue to rise. One of the major reasons for it is price differential. Natural fibers like cotton face various variability issues as cotton harvest fluctuate with climate issues and supply demand imbalance, thus the focus and market share has shifted to low cost synthetic fibers.
POLYESTER MANUFACTURING AND RAW MATERIALS
Since polyester is a petroleum product, the industry is reliant on petrochemicals for manufacturing & is directly affected by volatility and changes in oil prices and other downstream chemical products.
Polyester manufacturing process starts at oil refineries. Here oil is refined and processed to form various petroleum products and feedstocks. One of which is Naphtha. Heavy/ light naphtha is a feedstock for many useful downstream chemicals. Naphtha is used to form various compounds finding industrial use like Benzene, Toluene, Xylenes ( p-xylene, m-xylene), ethylene, propylene etc. P-xylene is what is important in this context as it is an input material for a key raw material of polyester.
P-xylene is oxidized to form PTA (Purified Terephthalic Acid) which is a major input material for polyester manufacturing. PTA accounts for more than 70% cost of raw material in polyester making. Nearly all purified terephthalic acid (PTA) is consumed in polyester production including polyester fibre, polyethylene terephthalate (PET) bottle resin and polyester film. PTA was first introduced in 1965 as an alternative feedstock to Dimethyl Terephthalate (DMT) for the production of Polyester. By end of 1999, almost 85% of total world production was based on PTA and this continues to grow. Today, PTA is the preferred raw material for Polyester which finds applications in all walks of life like clothing, furniture, upholstery, containers and films.
Production Process- Manufacturing Filament Yarn
1. PTA and Mono ethylene glycol are mixed to produce oligomer in esterification process.
2. The oligomer is then polymerized in presence of catalysts like Tio2, DEG & glycol.
3. Polymer chips are melted at 500-518°F (260-270°C) to form a syrup-like solution. The solution is put in a metal container called a spinneret and forced through its tiny holes, which are usually round, but may be pentagonal or any other shape to produce special fibers. The number of holes in the spinneret determines the size of the yarn, as the emerging fibers are brought together to form a single strand.
4. At the spinning stage, other chemicals may be added to the solution to make the resulting material flame retardant, antistatic, or easier to dye.
Drawing the fiber
5. When polyester emerges from the spinneret, it is soft and easily elongated up to five times its original length. The stretching forces the random polyester molecules to align in a parallel formation. This increases the strength, tenacity, and resilience of the fiber. This time, when the filaments dry, the fibers become solid and strong instead of brittle.
6. Drawn fibers may vary greatly in diameter and length, depending on the characteristics desired of the finished material. Also, as the fibers are drawn, they may be textured or twisted to create softer or duller fabrics.
7. After the polyester yarn is drawn, it is wound on large bobbins or flat-wound packages, ready to be woven into material.
THE ECONOMICS OF IT ALL
INDIAN MAN-MADE FIBER INDUSTRY
Currently, exports of Indian MMF textiles are around US$ 6 bn. accounting for around 30% in India’s textiles exports which was US$ 20.03 bn. (in 2017-18). Exports of Indian MMF textiles witnessed consistent growth till 2014-15. However, due to global financial crisis and consequent uncertainties that had prevailed in 2015, exports of man-made fibre textiles from India had also been impacted witnessing a decline of around 9%.
India has been a producer for low value added textile goods while China, Korea etc have an established high value added MMF textile capacity. India needs to invest in high value added products as it already has a low cost advantage over it's counterparts.
India also has one of the lowest consumption per capita.
Coming to raw materials, as mentioned above, PTA is the key raw material to manufacture polyester. China, South Korea, USA, Taiwan and India are the top PTA manufacturing countries. PTA & it's dynamics with upstream feedstocks decides the fate of polyester manufactures (of course and also demand for polyester).
PRICE & SUPPLY-DEMAND SCENARIO OF PTA AND UPSTREAM FEED STOCKS.
First to revise:
Oil refineries' output by value of petrochemicals ( mainly derived from naphtha) is less than 10 % of their total business so it's safe to assume that supply- demand shocks in petrochemical space does not materially impact refineries' operating rates. Which is to say that a typical refinery will not increase its output just because there's a shortage of a certain downstream chemical.
To start with crude, Covid- 19 has jolted the industry and we saw wide swings in prices. As of now, they have settled below 2019 average. Variations in crude prices do have a positive correlation with PTA prices. Decline in crude prices will broadly mean a decline in PTA prices.
WHAT MAKES THE CURRENT SCENARIO INTERESTING?
Apart from lower crude prices, the supply demand picture of naphtha , p-xylene and PTA is what makes it interesting. China comes in as a major player in the system. China accounts for around 65% of global polyester demand, which is why it is the highest manufacturer of Polyester, PTA and p-xylene. Still, China has been a net importer of PTA and p-xylene for a long time. In 2018 China decided to end it's dependence on Korea and Taiwan for it's petrochem needs. Following which, there has been a huge capacity addition for both p-xylene and PTA in China.
In 2019, PX (P-xylene) capacity increased by 36% year-on-year to 17.2 Mtpa, while production also increased by 30% to 13 Mtpa. In 2018, exceptional downstream demand growth drove China’s overall utilisation rate up to 80%. But in 2019, utilisation rates dropped to 76%, as new producers stabilised their mega plants, and some existing producers scaled back production. Wood Mackenzie expects domestic PX capacity to grow by another 5 Mtpa in 2020.
P-xylene's downstream PTA capacity has also had mega expansions since 2018. China's active PTA capacity has increased by 4.7 million mt/year since 2018 to stand at 48.9 million mt/year in November 2019, based on Platts data. Two more new PTA plants are expected to be brought online by early 2020; Hengli Petrochemical's 2.5 million mt/year No.4 new PTA line at Dalian and Xinjiang Zhongtai Chemical's 1.2 million mt/year at Korla in the Bayingolin Mongol Autonomous Prefecture.
It was mostly hunky dory till Covid came around. After the pandemic hit the world, textile market has taken a severe hit in demand, especially in China. Shockwaves of which impacted all in the supply chain.
We shall look at spreads of both Naphtha- PX and PX-PTA.
The naphtha-PX spread plummeted this year as the pandemic picked up pace. The lower the price difference between the 2 commodities, lesser margin and incentive do the PX producers have. South Korean spread plummeted too in line with China which is also partly attributed to new capacities in China. The South Korean companies’ exports are falling with China’s PX production on the rise. Specifically, their PX exports totaled US$6,192.73 million last year, down 18.7 percent from a year ago. For the first four months of this year, the exports dropped 43.6 percent year on year to US$1,408.29 million.
The PX-PTA spread too dropped this year. New capacities of both PX and PTA coming online will play a major role here too.
Due to overcapacity on top of sluggish demand, inventories are piling up in China.
The chart above shows how much product is being sent to warehouses rather than sold off compared to previous years. Warehouse receipt financing in China is also contributing to record increase in warehousing.
All the above factors have forced Chinese producers to consider cutting operating rates. It hasn't happened yet but if the demand supply scenario persists, it will. South Korea and Japan have already cut operating rates both due to Margin pressure & record low demand from China. If China cuts operating rates, which in effect means there's no demand for even local supply, exporters to China will be forced to cut operating rates further.
These scheme of things might augur well for the Indian polyester market for medium to Long term.
Even if crude prices rise, the huge capacity increase of both PX and PTA facilities coming online till 2023 in China will provide a cushion for polyester manufacturers. The important factor here is that there's little probability of there being a scarcity of supply of any element in the supply chain which can cause price fluctuations as both PX and PTA capacities are seeing expansion of similar magnitudes. Yes, things may get tricky if oil prices fall a lot and the refineries run at record low operating rates. The probability of which we'll leave up to you to calculate.
INDIA MIGHT BE IN A SWEET SPOT
Lower raw material prices will obviously translate into better margins for Indian Polyester manufacturers. Moreover, India terminated its anti-dumping duty of 23-160% on PTA in February this year which helps the local textile players further.
After Covid, the geopolitical aspect can play a mighty role. Along with anti- China sentiments, if we see incongruence in local demand between China and India, things could be really interesting. If India's demand stays robust with growing exports while China's stays sluggish, we could see a PTA price slump as Korea, Japan and China turn to India to dump their petrochemicals without any anti-dumping duties to stop them. Selected quality players in India possibly are in the sweetest spot.