China’s polyester market seems to be trying to tell us something quite important about the real state of China’s economy, 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, as the blog discussed 2 years ago for the Financial Times. PTA’s warning of weakness then also proved timely, as this marked the moment when the country’s leadership began the transition to today’s new economic direction.
As we know now, that weakness was then temporarily arrested by allowing lending to accelerate. But that does not seem likely to happen this time, if we are to believe the strong signals coming from Beijing.
PTA IS NO LONGER ‘AFFORDABLE’, DUE TO HIGH OIL PRICES
Polyester is the mostly widely used fibre in the world, and has normally been very affordable. Traditionally the first item that a rural migrant will buy on arriving in a city is a polyester tee-shirt or blouse. As the migrants start earning money, they buy more tee-shirts. Thus the market has grown steadily over decades.
But in 2008, of course, oil prices were heading towards record highs of $150/bbl, 5 times historical levels, as the subprime mania reached its height. PTA highlighted how these prices could not be passed through to end-users.
Now we are seeing the same picture. Ordinary Chinese simply cannot afford today’s oil price, now wealth effects created by the lending bubble are no longer available to boost their incomes. Even worse is that the high cotton prices encouraged by China’s previous leadership mean that polyester/cotton blends are also expensive.
PTA EXPORTS ARE REPLACING IMPORTS
The previous leadership’s stimulus programme since late 2008 has also now led to a vast surplus of PTA capacity. In turn, this is leading to a dramatic change in China’s trade, as shown by data from Global Trade Information Services:
- China’s PTA imports halved in Q1 versus 2014 and were a quarter of 2012 levels
- In volume terms they have fallen from 1.7MT in Q1 2012 to 400KT in Q1 this year
- And in recent weeks China has begun to export serious quantities instead – 45KT in March alone
This confirms the blog’s suggestion in its recent Research Note that we will now see major exports of products such as PTA, particularly as the currency continues to fall. This will make life very difficult indeed for those who assumed that China’s growth was sustainable, and who expanded their own capacity of PTA and other products.
The problem has been the illusion of the wealth effect. As this disappears, and China’s real estate prices fall, it will slowly become clear that income and age range, not GDP growth, are the critical factors for assessing future demand levels. The simple fact is that China is not a middle class country, and it was only the lending bubble that created an illusion that it was.
Benchmark product price movements since January 2014 are below, with ICIS pricing comments:
PTA China, down 12%. “Slower sales seen in the overall polyester markets in China have dampened market sentiment”
US$: yen, down 3%
Brent crude oil, flat
Naphtha Europe, up 3%. “Demand from European petrochemicals buyers is 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 if global prices rise as expected”
Benzene, Europe, up 7%. “ Raft of imports from Asia is likely to keep availability healthy in the near term”