Coke, Pepsi, and Dr Pepper are saving on their raw material costs. Planted cotton acreage in the U.S. will shrink this year. And India’s largest foreign-owned chemical producer has sought bankruptcy protection.
Seemingly unrelated, these events are all connected to a glut of purified terephthalic acid, or PTA, one of the main raw materials for making polyester resin and fiber.
The petrochemical industry is known for its boom-and-bust cycles of shortage followed by excess supply, but the current oversupply of PTA is of another order. It will last a long time and will impact several industries globally.
“A lot of chemicals are in oversupply presently, but PTA is probably the worst,” says Ashish Pujari, a senior director overseeing fiber, feedstocks, and Asian aromatics at the Singapore office of IHS Chemical, a market research firm. “We will need 10 years of demand growth to absorb the increase in supply.”
PTA and ethylene glycol are the two preferred ingredients for producing polyester fiber and polyethylene terephthalate (PET) resins. PTA is typically made via a process initially developed by Amoco Chemical—now BP—that involves oxidizing p-xylene in an acetic acid solution.
A few reasons explain why multiple companies, particularly ones in China, invested in PTA facilities at the same time. Around 2010, amid fast-growing fiber demand, several Chinese polyester makers decided to build their own PTA plants rather than continue to buy the material from external suppliers. The technology could be licensed, and bank loans were easy to get.
The Chinese firms generally opted to build capacity in excess of their internal requirements, in part because the PTA business was quite profitable at the time. “When facing make-or-buy decisions, producers got irrationally exuberant,” Pujari explains. But the new PTA producers overlooked the fact that “if everybody that uses PTA also becomes a seller, there will be no one left to buy.”
Now, adding to the price-depressing effects of oversupply is the decline in the cost of oil, the source of the p-xylene used to make PTA. The result is a sharp drop in the price of polyester, which competes against cotton in the textile market. Polyester’s lower-price edge has a ripple effect. The National Cotton Council predicts that U.S. farmers will plant 15% less cotton this year than in 2014.
Lower PTA prices have been good news for beverage companies that consume large amounts of PET in bottling their products. “Beverage companies will pocket their lower expenditures on PET resins,” says Richard Jones, head of investor relations at Indorama, a polyester and PET producer based in Thailand. Lower PET prices could spur the substitution of the resin for glass in the many countries that still use glass extensively, Jones notes.
Indorama itself has benefited from lower PTA prices, posting a 15% improvement in PET profit margins in 2014. The company produces PTA, but it is a net buyer. “The glut in PTA has not affected us negatively,” Jones says.
In contrast, MCC PTA India, an Indian PTA producer that is 66% owned by Mitsubishi Chemical, filed for bankruptcy early last summer. According to news reports, the firm later petitioned the Indian government to impose duties on PTA imported into India. Mitsubishi declines to comment.
Cheap PTA could motivate the U.S. to adopt trade sanctions against some countries. After complaints by U.S. producers, the U.S. International Trade Commission recently began investigating whether PET is being shipped to the U.S. below cost from Canada, China, India, and Oman. If the agency finds that dumping has occurred, it may slap import duties on PET made in those countries.
Meanwhile, BP, the world’s largest PTA producer, is implementing a complex set of measures to weather the current oversupply. Perhaps seeing the writing on the wall, the firm sold its plant in Malaysia in 2012 to India’s Reliance Industries. In Taiwan, BP’s joint venture with Taiwan’s CPC, called Capco, suspended operations at its four plants in Kaohsiung in the southern part of the island. In Taichung, in central Taiwan, Capco will likely invest in technology upgrades, says Robert Wine, a BP press officer.
In China, BP is expanding. It will soon launch production at a third PTA unit in the southern city of Zhuhai that features the latest BP technology and should be competitive even under the current market conditions, Wine says. In another repositioning move, BP last year bought out its partner Mitsui Chemicals in an Indonesian PTA plant.
And glut or not, BP continues to license its technology. India’s JBF Industries will use BP’s latest PTA process at a new plant in Mangalore. JBF, a producer of polyester and PET, will use most of the PTA internally.
As a well-established producer using the latest technology, BP may be suffering less than its competitors from the current oversupply in the PTA market. The companies that will be most affected, Indorama’s Jones figures, are those based in countries that were exporting PTA to China. “China remains an importer, but its needs are lower than previously,” he says.
Although the PTA industry is suffering from severe oversupply, its fortunes could change suddenly, Jones notes. Most PTA ends up in polyester fiber used in clothing. And clothing is a dynamic market that changes with fashions. Perhaps the return of the polyester leisure suit will be another consequence of the global glut in PTA.