By Marjorie Walker, Tecnon Orbichem, as published in Cotton Outlook's 2005 Special Edition

The last twelve months have been a nightmare for polyester producers. High oil prices have coincided with huge polyester filament and staple capacity additions in China as well as bumper cotton crops.

Mid 2004 there was much talk of oil prices moderating and the barrel likely to be priced in the $35-40 range for the next twelve months. Almost immediately oil prices instead went spiralling upwards and numbers in the mid $50s were recorded in October 2004, lifting the price of oil-based synthetic fibre feedstocks in its wake. The oil price fell towards the end of the year but for most of the second quarter of 2005 oil has been above $50/bbl and by June for the first time broke through the $60/bbl mark. Rapidly growing Chinese energy demand, combined with political uncertainties in the Middle East are blamed and are likely to continue to influence global oil prices for some time to come.

High oil prices have had a major impact in raising polyester raw material costs but their impact has been compounded by fundamental shortages of two key polyester raw materials, paraxylene (PX) and monoethylene glycol (MEG). The vast expansions in Chinese polyester fibre capacities of 2003, 2004 and 2005 appear to have been made without much reference to the ability to source feedstocks.

Prices for these raw materials PX and MEG have been bid steadily higher from 2003 onwards. China's entry to the WTO coincided with the penultimate round of textile quota elimination at the start of 2002 and by 2003 China's textile exports were demonstrating their dramatic potential to win market share. The shortages of polyester raw materials really seemed to bite in the second half of 2004 when high oil prices coincided with China's fibre and textile industry moving up another gear in preparation for the final elimination of textile import quotas by the US and Europe.

The MEG contract price in the Asian market has risen steadily from around $350/ton in 2002 to peak at around $1200/ton in Q4 2004. Prices dropped back earlier in the year but in April and May the price was above $1100 and $1000/ton respectively. In periods of strong demand and rising oil prices it seems inevitable that these price levels will be hit again and again until new capacities increase supply of MEG in two years time. Similarly paraxylene prices rose over the same period from $350/ton to $1050/ton, raising the price of purified terephthalic acid (PTA) a key polyester intermediate.

The impact of these cost increases inevitably pushed polyester staple prices steadily higher. But it has not been possible for polyester producers to achieve the full pass-through of increased raw material costs and polyester margins in 2004 were under enormous pressure in all producing regions and continue to be in 2005.

As oil prices drove polyester prices higher, cotton prices declined so that by October 2004, polyester staple prices had actually risen above the cotton price, with disastrous effect in terms of polyester spinners slashing operating rates or spinning cotton in preference to polyester.

However it is not all bad news for polyester staple. Polyester staple has other competitors among the synthetic fibre producers and for the most part acrylic polyamide and polypropylene fibre have suffered more acute cost pressures than polyester. The result is that in some applications polyester has been winning market share away from other even more expensive man-made fibres.

However there's no doubt that the key comparison for polyester staple is with cotton and here polyester producers continue to face very tough competition. There is little to suggest that polyester raw material costs will subside in any meaningful way over the next few years. However cotton pricing is once again under pressure as predicted surpluses continue to be revised upwards for the current crop year and for 2005/06.

The polyester oversupply situation could be worse. Three factors have prevented it. The first is the Chinese government tightened credit in 2004 with the net result that some projects were shelved and some were delayed. The second is China's power supply problems, which have not allowed polyester plants to run at high levels. Thirdly the poor profitability of the staple industry has also played a role both in project delays and in severe production cutbacks.

Nevertheless China brought one million tons of staple onstream mid 2003 to Q3 2004. It brought 0.8 million tons of staple onstream in the first quarter of 2005 and expects to bring 1.4 million tons onstream by the end of the current year. These expansions are out of proportion with any increase in global polyester demand and likely to have a very negative impact on polyester staple production in Taiwan, South Korea and other locations. Not only are these countries losing their export markets in China, they are already meeting low priced Chinese exports in other world markets and losing market share to them.

Global polyester filament and staple capacity at around 33.8 million tons is way ahead of demand at around 24.4 million tons. China's staple and filament capacity accounts for over half global production capacity and with announced additions the figure is likely to rise to something closer to 53%. China's polyester staple capacity at 5.8 million tons is around 45% of the global total.

Excess capacity and low operating rates make it very unlikely that adequate margins will be earned in the polyester staple business for some time to come and this presumably will be the mechanism that will gradually restore some balance to the polyester staple marketplace with the closure of capacities outside China.

In the US Wellman is tackling this issue by converting its Pearl River polyester staple line to PET resin and there is ongoing industry rumours that other capacities will be converted. In West Europe Montefibre closed their Acerra staple plant in 2003 and here too there is talk of conversion to PET resin for bottles. However these are tiny in the context of global oversupply. An additional complicating factor in the polyester market is the growing availability of recycled resin, which undercuts new polyester fibre chip prices but is readily accepted in many uses.