Polyester filament under mounting pressure with worse-than-anticipated peak season performance

Middle East tensions escalate again; oil prices break above US$100

Since the start of September, Middle East geopolitical conflicts have escalated once again. On one hand, key shipping routes have come under threat, with the conflict spreading from localized skirmishes to core global crude transport corridors including the Persian Gulf and the Red Sea–Bab-el-Mandeb Strait. On the other hand, oil production facilities have come under attack: sections of Saudi Arabia's east-west oil pipeline were shut down following drone strikes. If not restored in the near term, roughly 4% of global oil supply could be at risk. Meanwhile, Saudi Arabia's average daily oil output in August has fallen to its lowest level since 1990. Affected by these developments, both WTI and Brent crude broke above US$100/barrel.

Feedstock costs surpass March peak

With polyester feedstock inventories at low levels and circulating spot supply relatively tight, the escalation of geopolitical tensions drove futures higher, compounded by a sharp rise in basis, pushing polyester feedstock costs above the peak seen at the outbreak of the war in March.

Downstream demand fails to follow through

In contrast, looking at the downstream segments of the industrial chain, more than half of September has passed, but downstream demand has not effectively followed through. Feedstock prices have surged, and downstream mills with relatively good sales are mostly those holding low-priced inventories. Actual downstream cost pass-through remains weak, with losses on spot-purchase production widening. Some downstream mills with low feedstock inventories or insufficient orders have begun cutting production again, particularly DTY processors. Downstream mills are extending the use cycle of high-priced feedstock through production cuts while reducing the risk of accumulating high-priced inventory. If orders do not improve, many downstream mills are considering holiday shutdowns during the upcoming Mid-Autumn Festival (September 25-27) and National Day holiday (October 1-7).

PFY profits squeezed further

With upstream markets strengthening and downstream demand weak, pressure on midstream polyester has risen further. PFY producers have resorted to periodic promotions to boost sales, and this volume-for-price approach has continued to compress the high profits PFY enjoyed earlier, with some products even entering loss territory. Until end-user demand improves notably, it appears difficult for PFY to break out of its predicament in the near term. Against the backdrop of firm feedstock prices, PFY profits may face further compression.

Industry-wide production cuts may be looming

Among current polyester products, PET bottle chip, PSF, and PET fiber chip have all seen industry-wide production cuts due to losses. PFY alone has maintained relatively good industry profitability, thanks to the production cuts led by the three major producers (Tongkun, Xinfengming, and Hengyi) taking the lead, which has also kept operating rate at factories outside the big three relatively high. Now, as industry pressure mounts further and PFY profits are compressed, if conditions persist, the PFY industry may gradually move toward industry-wide production cuts.

As of September 15, polyester products across the board were in loss territory, with losses widening notably.