Market and product

China’s polyester market seems to betrying to tell us something quite important about the real state of China’seconomy, as the chart above shows for the main raw material, PTA(terephthalic acid):

• It focuses on the margin between PTA prices and naphtha feedstock (Singapore basis)
• Normally this is a premium between $200/t – $300/t as shows by the ‘tramlines’
• But it has now moved to a discount for only the second time in history
• The first time was in 2008, as part of the prelude to the start of the economic Crisis

PTA has good forecasting ability, asthe blog discussed 2 years ago for the FinancialTimes. PTA’s warning of weakness then also proved timely, as thismarked the moment when the country’s leadership began the transition to today’snew economic direction.

As we know now, that weakness wasthen temporarily arrested by allowing lending to accelerate. But that does notseem likely to happen this time, if we are to believe the strong signals coming from Beijing.

PTA IS NO LONGER ‘AFFORDABLE’, DUETO HIGH OIL PRICES
Polyester is the mostly widely used fibre in the world, and has normally beenvery affordable. Traditionally the first item that a rural migrant willbuy on arriving in a city is a polyester tee-shirt or blouse. As themigrants start earning money, they buy more tee-shirts. Thus the markethas grown steadily over decades.

But in 2008, of course, oil priceswere heading towards record highs of $150/bbl, 5 times historical levels, as thesubprime mania reached its height. PTA highlighted how these pricescould not be passed through to end-users.

Now we are seeing the samepicture. Ordinary Chinese simply cannot afford today’s oil price,now wealth effects created by the lending bubble are no longer availableto boost their incomes. Even worse is that the high cotton prices encouraged by China's previous leadership mean thatpolyester/cotton blends are also expensive.

PTA EXPORTS ARE REPLACING IMPORTS
The previous leadership’s stimulus programme since late 2008 has also now ledto a vast surplus of PTA capacity. In turn, thisis leading to a dramatic change in China’s trade, as shown bydata from Global Trade Information Services:

• China’s PTA imports halved in Q1 versus 2014 and were a quarter of 2012 levels
• In volume terms they have fallen from 1.7MT in Q1 2012 to 400KT in Q1 this year
• And in recent weeks China has begun to export serious quantities instead – 45KT in March alone

This confirms the blog’ssuggestion in its recent Research Note that we will now see majorexports of products such as PTA, particularly as the currency continues tofall. This will make life very difficult indeed for those whoassumed that China’s growth was sustainable, and who expanded their owncapacity of PTA and other products.

The problem has been the illusion ofthe wealth effect. As this disappears, andChina’s real estate prices fall, it will slowly becomeclear that income and age range, not GDP growth, arethe critical factors for assessing future demand levels. The simple factis that China is not a middle class country, and it was only thelending bubble that created an illusion that it was.

Benchmark product pricemovements since January 2014 are below, with ICIS pricing comments:
PTA China, down 12%. “Slower sales seen in the overall polyester marketsin China have dampened market sentiment”
US$: yen, down 3%
Brent crude oil, flat
Naphtha Europe, up 3%. “Demand from European petrochemicals buyersis minimal, although volumes continue to move to both Asia and the US”
S&P 500 stock market index, up 2%
HDPE US export, up 7%. “Demand for US material may improve ifglobal prices rise as expected”
Benzene, Europe, up 7%. “ Raft of imports from Asia islikely to keep availability healthy in the near term.