Polyester Demand to Remain Stable, US-China Trade Dispute Could Lead to Uncertainty on Margins: ICRA

The current global demand outlook for polyethylene terephthalate (PET)/polyester remains broadly weak given the uncertainty surrounding the trade war between the US and China and the overall slowdown in economic growth among major consumer markets. However, over the long-term, global growth in polyester consumption is expected to be at a CAGR of about 6%. Contrary to the global scenario, the current domestic polyester industry continues to grow at a healthy rate driven by growing demand for synthetic fibres and plastic-based packaging products. The basic building blocks of polyester are mono-ethylene glycol (MEG) and purified terephthalic acid (PTA), which are derivatives of ethylene and Paraxylene (PX), respectively. While the prices and margins for PX and MEG have been declining due to excess capacities, those for PTA and PET chips continue to remain firm, supported by a healthy demand environment.

 

Commenting on the margins for producers in the polyester chain, Mr. K. Ravichandran, Senior Vice-President & Group Head, Corporate Ratings, ICRA, said that the global PX demand is expected to grow at a CAGR of nearly 6 per cent over 2019-2024; however, the global supply additions are expected to exceed the demand growth. Outlook for the Asian PTA market looks positive amid limited new capacity, despite uncertainties around demand from downstream polyester and textile sectors. In the case of MEG, there has been a steep decline in prices in FY2020 mainly due to build-up of China port inventory, higher production, and start-up of new capacities in the USA. Further MEG capacity additions are expected in Asia and the USA in H2 2019; however, operating rates at new capacities are expected to remain low. Owing to different dynamics across different fiber intermediates, integrated producers are well-positioned to face the ongoing uncertainty and standalone producers could be impacted by the fluctuations in margins.

 

Commenting on the integrated margins for polyester producers in India, Ms. Anubha Rustagi, Senior Analyst, ICRA said that integrated polyester margins have softened in H1 FY2020, primarily due to weakness in PX and MEG margins. Continued weakness in MEG prices along with the steady domestic demand for PET chips is expected to offset the firm PTA prices and keep the polyester margins steady in the near term. Further, a shift in the margins from PX to PTA and downstream polyester applications will allow the integrated producers to withstand any price-led uncertainty owing to the current trade tensions between the USA and China, she said.

 

Spinning mills across India are gradually moving towards a higher share of man-made fibre vis-à-vis cotton in their fabric blends to cushion their profitability against increasing cotton prices. However, there is further potential for an increase in demand for man-made fibre as the domestic average is still much lower than the global average of 70 per cent share of man-made fibre in blended fabrics. Domestic prices for polyester staple fibre (PSF) increased in FY2019. However, the prices have weakened in H1 FY2020. While the prices have weakened due to softening of feedstock prices, the PSF margins remain healthy due to stable domestic demand. The spread between the domestic prices for Indian cotton fibres and the polyester fibres recovered in Q1 FY2020, but has since softened in FY2020 owing to weakening of cotton prices during the period from an increase in cheap cotton imports along with lower yarn exports to China.