BUSINESS
Capacity Expansions In Asia Depress Polyester Markets Worldwide • Excessive optimism by Asian fiber producers will keep prices for polyester, intermediates tow for years to come Jean-François Tremblay C&EN Hong Kong "' ^T^ ompetition and free enterprise • will bring about the most effi^ ^ ^ cient allocation of the available resources/' Or so they say in basic classes in economics. But one might be excused for having some doubts when looking at the spectacular bout of overinvestment in capacity expansion in polyester fiber and fiber intermediates that has taken place in Asia over the past year. The sudden boost in capacity and supply, which is far from over, has led to a sharp drop in world prices since the end of 1995. And although demand for the fibers is still growing, the ongoing expansions are so massive and rapid that demand is not expected to catch up to supply until the end of the decade.
For several years now, Asia has been where the action is as far as polyester is concerned. The region has been the main producer and consumer of polyester fibers, in addition to experiencing the world's fastest growth in demarrtL A study by the Dutch chemical firm Akzo Nobel (C&EN, May 27, page 13) shows that in 1995, Asia accounted for more than half of the world's output of manmade fibers, two-thirds of which was polyester. Moreover, for many years, polyester has been seen as offering the most promising growth of all fibers. These rosy forecasts are the main reason why firms have invested so much in expanding production of polyester and its intermediates, explains Yasuhisa Tano, general manager of the chemical section of Japanese trading firm Marubeni in Hong Kong. "About five years ago, those in this industry had similar data or analyses," he says. "The market information was very optimistic and showed a very bright future for polyester growth, especially in Asia." Although it is generally labeled as a trading firm, the huge Japanese company is also heavily involved in manufacturing. It operates several textile plants in Asian countries, including China.
Of all the fibers, Tano says, polyester showed by far the best prospects. Whereas nylon was expected to grow about 1% per year, growth in world demand for polyester was expected to be 6 to 7%. In Asia, forecasters were seeing yearly increases in demand of 12 to 13%, while in China, growth was estimated to average 20% per year, Tano says. Moreover, about five years ago, China was importing so much equipment to produce polyester fibers and fabric, Marubeni's textile machinery division "couldn't meet demand," he adds. Observers of the petrochemical industry were also coming to believe that growth in Asian demand could not fall short of forecast. Speaking in Singapore in May, Teresa Acosta, a xylene-chain consultant and group vice president at Houston-based petrochemical consultant firm DeWitt & Co., said: "The growth in petrochemical development in this region has been measured in double digits for a number of years. I started visiting in the early 1980s, and I would tend to fall short forecasting future years' consumption because, in my own mind, I could not envision year-to-year growth of 12 to 15% routinely. We had been trained to forecast
It will take a decade to use all planned global polyester capacity Production
Capacity
Capacity use
Billions of lb 80
Billions of lb 801
Percent 1001
60
60 90
40
40 H
20
20 ^ β
80
0 1995 96
97
98
99 2000 2005
1995
96
97
98
99 2000 2005
701 at 1995 96 97
m 98
99 2000 2005
Source: DeWitt & Co.
SEPTEMBER 2,1996 C&EN
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BUSINESS
with cycles, meaning that growth flattens some years and then resumes." But in Asia, she said, "petrochemicals and the economies appear to expand in a straight line with very few pauses." When companies don't have enough capacity, they lose the opportunity to earn substantial profits in periods of strong demand and high prices. Economic growth in Asia might be consistently high, but demand is at times stronger than at others. Prices for polyester and its raw materials can, in Asia, double or even triple within months. It is highly frustrating for producers not to be able to meet demand at the peak when additional increases in prices translate into profit. This acts as a powerful motivator to add capacity. When a double-digit upward trend in consumption began in mid-1994, companies accelerated various construction projects they had under way, especially in the areas of polyester and its raw material purified terephthalic acid (PTA). Prices for polyester, PTA—which is a downstream product of p-xylene—and ethylene glycol (EG) usually move in the same general direction, so those commodities were all becoming more profitable in that period. When a trend, up or down, in the price of PTA or EG begins, it can be difficult to predict where it will end. For example, PTA was priced at less than 27 cents per lb in the spring of 1994, then doubled to 54 cents in the spring of 1995. In roughly the same period, EG went through a similar price swing, although in a lower—18 to 36 cents—range. But EG can be surprisingly volatile. In 1988, it rose from about 18 cents per lb to more than 63 cents before dropping back down to the original price level over the following one and a half years. One reason that EG can have more extremes than PTA is that companies are relatively reluctant to invest in its production facilities. The reasoning, according to consultants, is that EG facilities are capital intensive and need to be large in order to be profitable. Moreover, firms can find it difficult to differentiate their product from that of competitors. In contrast, PTA production facilities can be built in relatively small increments. And PTA product differentiation is not only possible, it is noticeable. For instance, according to Ken Nishikawa, assistant general purchasing manager for raw materials in Tokyo for Toray In14
SEPTEMBER 2,1996 C&EN
Use of polyester for bottle resins will swell in 10 years Fibers 66%
Bottles 18%
Fibers 61%
Bottles 27%
Film 6%
Other 10%
Film 4%
Dther 8%
1995 demand = 38.9 billion lb
2005 demand = 70.9 billion lb
Source: DeWitt & Co.
dustries, Japanese polyester producers generally refuse to use imported PTA because it fails to meet local quality requirements. On the other hand, Nishikawa adds, Mitsubishi Chemical markets, in addition to PTA, something that it calls "QTA," which is a cruder version of PTA made via a simpler process. From 1994 to 1995, world PTA capacity expanded by 3.7 billion lb, most of which was built in Asia. Polyester production facilities were also expanded, and that expansion is still continuing. But although the expansions were partly motivated by a desire to cash in on rising prices, the increase in supply in fact led to a spectacular price drop. At one point in Taiwan at the beginning of this year, producers were losing money on the polyester they sold. Meanwhile, PTA prices have dropped from a peak of 54 cents per lb at the end of last year to about 26 cents now, the latest price announced by Amoco's Taiwan subsidiary. South Korean producers sell for even less. In the area of PTA, more than half of the capacity expansion between the end of 1994 and year-end 1995 took place in Taiwan and South Korea, two countries that this year have one-third of world production capacity of PTA. Looking at the companies involved in Asia in the past year, Amoco alone has come on-line with about 2.2 billion lb of additional annual capacity. Taking into account the joint ventures in which the company holds a significant stake, Amoco Chemical will operate 28% of Asia's total PTA capacity in 1996, an executive with a Japanese polyester producer tells C&EN. In Taiwan, Amoco's 49%-owned subsidiary Capco, after recent expansions, has annual capacity of 3.1 billion lb. Why did firms fail to suspend projects when a glut in the market seemed
to be so obviously on its way? The simple answer is that they face different conditions and use different rationales. And in the end. each one believes that, as one marketing manager put it jokingly: "If the overall operating rate is going to be 60%, it doesn't matter. My plant will operate at 80%; other companies' facilities will operate at 55%." Individual projects at times face particular dynamics that make them seem worthwhile even if the market as a whole is expected to be depressed. Such is the case, for instance, for Amoco Chemical's proposed PTA investment in Zhuhai, Guangdong Province, China. There, the company had been waiting for seven years before gaining Beijing's approval this spring. Finally obtaining the authorization acts as a great motivator to build the project. Moreover, Amoco Chemical, in going ahead with this project, has taken into consideration the long-term potential of the Chinese market and the
Tano: polyester showed great promise
proximity of Zhuhai to the Pearl River Delta where many polyester producers operate. The company considers a presence in China to be a strategic objective, with one Amoco Chemical executive describing the Zhuhai project as a "beachhead." On a smaller scale than Amoco, Japan's Mitsubishi Chemical has been operating PTA plants in South Korea and Indonesia, and it is considering India. In expanding in these countries, the firm faces its own realities. The home market in Japan is not growing, so it must expand elsewhere in Asia. The company considers PTA manufacturing facturine to be one of its strengths in petvetrochemicals. Even when the market is depressed, Mitsubishi Chemical can count on getting business from the overseas operations of its traditional Japanese customers. For instance, in countries where both Mitsubishi Chemical and textile producer Toray Industries are present, Toray will source at least partly from Mitsubishi Chemical because of a long-standing and tacit "gentleman's agreement," says Nishikawa. In South Korea, PTA capacity is expected pected to increase from 2.9 billion lb in 1992 to about 9.0 billion lb in 2000, according to DeWitt. Further downstream, this year alone the country's capacity for polyester filament is increasing 46%, and polyester staple will register a 55% boost. South Korea is becoming known as the home of reckless expansions. South Korean firms, Nishikawa says, are intensely competitive among themselves. A capacity expansion by one firm motivates similar expansions by others
in order not to lose market share. Because they are motivated by factors quite independent from profitability, one executive described the effect of Korean firms on the market as a "typhoon." Another one called the companies "strange," adding that they seem to operate without strategy. DeWitt's Acosta is more kind: "History has proven the Koreans (and other Far Easterners) right, as the consumption for most petrochemicals in the region has exceeded the most optimistic expectations." Traditionally, overinvestment in chemical capacity in Asia has not been a major problem. Although sudden increases in supply might lead to price declines, growing demand eventually picks up the slack and prices recover. Things have been more serious this time because an unprecedented increase in capacity coincided with an austerity drive in China and slower economic growth in Asian countries. "Once the new capacity began to be made public, the anxiety that was in place about potential shortages—some of which were actually experienced— began to go away," Acosta says. "China was quite instrumental in putting a close to the uptrend portion of the cycle. Inflationary pressures plus [the Chinese government's] attempt to clamp down on tax evasion combined to shut down imports of all products down the chain. In an environment of extremely tight supply, the perception of a large demand drop (the Chinese volumes were probably somewhat exaggerated, in many minds) immediately triggered thoughts of easing down on inventory accumulation, and buy-
Asia's share of PTA capacity is growing rapidly Rest of world , 40%
Taiwan 17%
Rest of world 32% South Korea 16%
eiV-i^!'J'^v
Other
Asia 27%
1995 global PTA capacity = 28.4 billion lb PTA = Purified terephthalic acid. Source: DeWitt & Co.
Taiwan 14% South Korea 16%
Other Asia 38%
2000 global PTA capacity : 58.2 billion lb
ing got postponed on the uncertainty of how prices would fare." In the polyester market, several factors already in place will contribute to a price recovery. Acosta believes polyester will be in better shape because of destocking in most parts of the world. Additionally, polyester fabric should benefit from an improved "fashion sense" in 1996, which would boost demand. Furthermore, there is the wild card of a potentially poor cotton harvest in China, the result of serious floods during summer. This, says Marubeni's Tano, would boost Chinese demand for synthetic fibers, as well as cause waves on Chicago's commodity exchange. An improvement in the market would be excellent news for^Chinese polyester producers, some of which are experiencing difficulties at present. China's largest producer, Yizheng Chemical Fibre, recently reported a drop in earnings of 75% for the first half compared with, the year-earlier period. The company, located in Yizheng, near Nanjing in Jiangsu Province, blamed the drop on a low utilization rate in downstream textile factories, the growth in domestic production capacity for polyester, and "dumping" by companies from South Korea and Taiwan. Undaunted, it is proceeding with ambitious expansion plans. But conditions will likely remain bleak as far as p-xylene and PTA are concerned, Acosta says, because of the high rates of ongoing capacity additions. She believes some companies will cancel or postpone their expansion plans. The most likely to cancel, Acosta says, are the companies that, unlike Amoco, are not integrated and the ones that, unlike Mitsubishi Chemical, do not enjoy the benefits of long-term supply agreements. This should make South Korean firms likely candidates for shelving projects, but this is something that they rarely do. As a whole, serious polyester and PTA oversupply conditions are expected to remain for several years. Because it is too late to stop many of the expansions now in progress, world PTA output capacity should exceed 58 billion lb per year by 2000, when, by some estimates, only 60% of that amount will be needed worldwide. For polyester, DeWitf s data show the peak in excess capacity will occur in 1998, when world capacity will be about 64 billion lb and only about 47 billion lb will be needed. • SEPTEMBER 2,1996 C&EN 15
