Source: ICIS supply and demand database
By John Richardson
THE polyester chain in China is a good example of the dangers of assuming that the big macroeconomic picture will remain more or less unchanged.
Large amounts of purified terepththalic acid (PTA) (see the above chart) and polyester capacity seems to have been added in China on the widely-held assumptions that:
- China would remain the workshop of the world for textiles and garments.
- Western demand for Chinese exports would quickly bounce back following the 2008 economic crisis.
- Cotton would remain very expensive, so encouraging continued strong replacement by polyester.
- China’s economy would continue growing at 10% or more per year.
- Even if all of the above turned out to be wrong, the central and local governments in China would nearly always rescue PTA and polyester investors by continually rolling over, and perhaps eventually writing-off, most of their bad debts. It was perhaps, also, the same as with the US banks: The more you borrowed, the less likely it was that you would be allowed to go bust because you would become “too big to fail”.
But:
- Five-six years ago labour costs started rising in China and so the evidence was already there that China might lose its automatic “go to” position with Western textiles and garments wholesalers and retailers. This is now happening.
- Demographics drive demand. As a result, the West needs to find new sources of growth as it gets older. People don’t buy as many dresses, shirts, curtains and sheets etc when they retire.
- Cotton prices were driven to their record March 2011 high by a “tidal wave” of central bank liquidity, writes fellow blogger Paul Hodges in this post. Not enough people seem to have paused to ask themselves this question: “Are these high cotton prices sustainable?” The answer has turned out to be “no”. Cotton’s speculative bubble has burst and now, according to the US Department of Agriculture, “there are enough cotton inventories to make three pairs of jeans for every person in the world”. To protect its own position and avoid social unrest, China is buying domestic cotton production at 151 c/lb – 80% higher than global prices. But this is probably merely accelerating re-shoring of textiles and garments production as manufacturers look for cheaper overseas sources of cotton. And, of course, on a global basis, low cotton prices means weaker demand for polyester.
- Barclays has joined a growing consensus view that there will be a long-term deceleration in Chinese GDP growth. It cites China’s own demographics as a big factor, which is one of the reasons why labour costs have gone up. But another major cause of slowing growth seems likely to be a rebalancing of the economy away from investment and towards domestic consumption. We feel that the only issue in doubt here is the timing.
- The central and local governments in China might well be tempted to continue to “kick the can down the road”. Big loans to the corporate sector have already been rolled over in an effort to mask the underlying extent of non-performing loans. But it seems very unlikely that this will carry on indefinitely. At some stage,though – perhaps as soon as next year – we could see significant consolidation in the polyester sector.