Where China PET resin industry be heading to under massive cutback and high shipping cost

Since Aug, PET bottle chip capacity shut down is around 3.6million tons. Till Aug 10, China PET bottle chip operating rate averaged down to 70.7%. (78% based on designed capacity of 12.46 million tons/year).

The reason of O/R decline mainly comes from two points: 1. the large high/low spread and slack new order intake. PET bottle chip processing spread has been hovering around 400-500yuan/mt for a long while. 2. Export shipping fee remains expensive and supply of container is tight.

Recently, due to the spread of the epidemic, logistics and transportation in some areas have been affected, hence delivery of polyester raw material and products are both restrained. Some PET bottle chip plants are forced to cut down production. Overall, delivery is still sustainable, though slower.

Looking from end-user perspective of view, procurement by beverage and edible oil plants is rigid, particularly some factories that haven’t built enough stock previously. PET sheet sector, operating rate in S. China is merely 40-50% while basically stands at 70-80% in E. China. For most PET sheet producers, 7000yuan/mt is the top cost line they can accept, and contract violation was heard before as PET resin value moved to higher than 7000yuan/mt. For traders, at present, some traders lack materials, and they may need to purchase from factories later on to preserve stable supply. But current price is a bit too high, so they temporarily obtain part of the goods from paper market.

In addition to traditional traders, raw material traders and asset management traders have participated in the past two years. Apart from traditional traders, raw material traders and asset management traders have been participating in PET bottle chip spot trading in the past two years. This part of traders are more combined with futures market, hence once market longs feedstock or PSF futures and shortens PET resin, it is not surprising to see extreme low pricing, such as 6680yuan/mt and 6710yuan/mt that occurred previously.

From the cost point of view, take Jul raw materials settlement cost at 6400yuan/mt, and the monthly average price of PET bottle chip calculated as 6940yuan/mt, PET average processing is merely 500yuan/mt plus. Since CCFGroup price index is updated every day, while low-priced deals are mainly intensively done within certain period of time, so the actual monthly average processing spread is even lower. Based on spot value, the average spot purchasing prices of the recent 10 working days: PTA 5384, MEG 5435, polyester feedstock cost: 6424. PET bottle chip price averaged at 6900yuan/mt in Aug 2-10. Processing spread is less than 500yuan/mt.

So, although PET bottle chip factories once pulled up prices to more than 7500yuan/mt, basically there was no market. According to CCFGroup understanding, the highest traded price for large volume transactions in Jul-Aug is less than 7000yuan/mt, mostly in the range of 6500-6850yuan/mt. It is very difficult for the processing spread to break through 600yuan/mt, and there is a high probability that the processing spread will hover around 400-500yuan/mt for a while in the future.

Export order intake of 3 months in Apr-Jul is less than 200kt, and the rest month is also merely slightly above 200kt. Jan-Jul export order intake totaled 1.64 million tons, up 200kt from 2020 level, but this part of growth is mainly contributed by Q1, and the YOY increase in Apr-Jul 2021 has been shrinking.

We calculate an shipping freight index according to different proportions of the ocean shipping base price officially announced by the Shanghai Shipping Exchange (the index includes the freight rates of Europe, North America, South America and the Middle East), and makes the following chart. According to the trend chart, the lowest point of the ocean freight fee for the year was around US $4200/TEU, and last week's high was close to US $7000/TEU, with an increase of around 67% during the year. But this is not the main composition of freight. Some ocean shipping companies will also add high additional charges, pushing the total freight to double or more. The current freight rates of some routes are basically 4-5 times that of the same period last year.

So far, the high shipping fee is inevitable, hence some overseas customers began to accept breakbulk form to reduce cost. For example, a large ship destined for Africa or Europe is originally loaded with sugar and other products, but there is still some spare space, then some PET resin will be loaded together. In normal case, customers will worry about negative effects of mixed loading, but they have no choice now.

In the later stage, demand from Europe and the United States still exists at the end of the year, even if sea freight continues to rise, rigid procurement will still appear. The impact of the current epidemic in Southeast Asia has prompted some orders to flow back to the Chinese mainland. Therefore, from the point of view of shipping schedule and freight, we think that export is worth looking forward to later on.