PTA market soars driven by high cost and better fundamentals

The most active PTA contract for May 2021 delivery on Zhengzhou Commodity Exchange hits 5.03% limit up to 4,594yuan/mt on Feb 23. The upward trend continued and touched the limit up again this morning to 4,882yuan/mt, a new high since February 2020. The buyers in PTA spot market followed the increase actively, and the spot/futures spread was strong, with the late Mar goods traded at TA2105-70yuan/mt. However, the PTA processing margin has fallen below 300yuan/mt to 255yuan/mt yesterday, the lowest since April 2017. The increase in PTA prices and the strengthening of basis are mainly driven by the costs and the improvement of fundamentals.

1. Cost
The crude oil prices has returned to the pre-pandemic levels, buoyed by expectations of a strong post-pandemic economic recovery and the decline in crude oil inventories. WTI crude oil reached a maximum of $63 per barrel, and Brent oil hit $65.83 per barrel. In addition, the cracking spread of naphtha was also strong, and the spread of naphtha-Brent expanded to $121/mt. In terms of PX, the price has followed the rise in anticipation of destocking. PX price rose to $839/mt on Feb 24, close to the level in January 2020, and the PX-naphtha spread has been restored to $239/mt.

2. Polyester plants actively purchase as sales improve
After the holiday, the sales of polyester products expanded largely in a bullish atmosphere. During Feb 22-23, the sales ratio of filament yarn were 210% and 140%, respectively, while the sales ratio of polyester staple fibers were 215% and 157% respectively. Product inventory dropped significantly with POY down to 5.8 days, FDY to 16.5 days, DTY to 22.2 days and PSF to -5 days, much lower than the same period in previous years. Polyester factories followed the increase in raw material prices positively. The price of polyester products rose broadly with PET bottle chip to 7,200yuan/mt, PSF to 7,865yuan/mt and POY to 7,555yuan/mt yesterday. The cash flow was also greatly improved. Therefore, the enthusiasm for purchasing raw materials has increased, which was supportive to PTA spot market.

3. Expected improvement in PTA market fundamentals
The market fundamentals are expected to improve greatly from March to April. Although Fujian Billion's 2.5 million tons/year PTA unit runs smoothly, and Honggang's 2.5 million tons/year PTA unit is scheduled to be put into production at the end of February, more PTA producers are mulling to shut the units for turnaround due to poor profit.　 Sinopec Shanghai has shut the PTA unit and Yisheng Hainan plans to restart in mid-March. In addition, Reignwood and Hengli have the turnaround plans, while Xinfengming and Zhongtai are also considering the maintenance plans. If the overhaul of the above-mentioned units is implemented, the output of PTA is estimated to be 4.4-4.5 million tons. In terms of demand, it is expected that the polyester polymerization rate will increase to around 92~93% in March. In addition, the consumption of non-polyester sector has also recovered; export volume remains high and the demand in Southeast Asia and Europe is still increasing. The export volume in March is expected to be around 200,000 tons. Therefore, PTA inventory will probably reduce by around 100,000-150,000 tons.

Driven by the higher cost, the purchase of polyester plants after the holiday and the expectation of reduced PTA inventory in the later period, PTA prices jump strongly. From the perspective of liquidity, mainstream suppliers reduced their supply in March contracts due to maintenance, and some suppliers also have plans for out-sourcing. Market liquidity in March will not be too abundant, and the spot/futures spread may still strengthen further. However, PTA futures warehouse receipts has reached around 1.7 million tons. Once the spot/futures spread is stronger than the warehouse receipt/futures spread, the warehouse receipt will flow back to the spot market, suppressing the increase in spot prices. Therefore, in the short term, with the improvement in fundamentals, the PTA processing margin may slightly recover. However, under the high inventory pressure, PTA price increase is still driven by costs. In the medium and long term, PTA market will still face the pressure from the large new capacities.