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Insight | Time:Jun 28 2018 10:04AM
Polymerization rate unlikely to see marked decline within short
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Since rebound from 2016 low, polymerization rate is continuously swinging up. Enhancing profit and fast growing apparent consumption help push it higher. Meanwhile, long-term shut units restarted through restructure.

Based on original assessment, if apparent demand growth is limited, after capacity expansion, theoretically, players are expecting polymerization rate to decline this year. However, the rate goes on rising in a steady way.

Involving factors are as follows:

First, polyester profit as motivator.PET bottle chip cash flow skyrocketed, mainly because unexpected supply demand change. Let alone PET bottle chip, other polyester products including PFY, PSF and even PET fiber chip all maintained tolerable margin. Logic behind could be strong demand and prudent operation on polyester feedstock, as well as persistently good cash flow. In polyester sector, no obvious stock pressure is seen in 2018, hence constant high production rate is not surprising.

If polyester plants take the initiative to lower O/R, seen from profit perspective, the primary trigger could be PET fiber chip in loss.

Actually, PFY producers have made some O/R adjustments in the first half of 2018 as coarse denier filament margin is less than fine denier ones, but the spare capacity is shifted to produce PET fiber chip, rather than shutdown,. Overall, PET fiber chip is also profitable. Later on, if fiber chip is to lose, factories may consider cutting O/R.

Besides, PET fiber chip output increase is another booster. A spate of polyester capacities were launched in the first half of 2018, but Hengbang III, Jiaxing Petrochemical and Zhongshi II, for example, though launched in Q1, their integrated spinning capacity came up quite slowly. Early products are PET fiber chip. Meanwhile, Jinqiao and Wanjie’s PET fiber chip units commenced and other polyester units raised O/R. Hence once market performance weakened, PET fiber chip stock could be the restricting element.

PET fiber chip is also the easiest segment to control concerning products cash flow.

Second, end-user market performance in terms of demand.End-user O/R decreased gradually in Jun. Despite softer rigid demand, it’s still flexible temporarily. The flexibility is to some extent bolstered by tolerable profit. Particularly for some lucrative products, ample profit is sufficient to cover price change, hence price impacts little on demand. Some enterprises even deem no slack season before end 2018. In this term, our view towards end-user industry has not been pessimistic. It’s just seasonal downside.

It doesn't mean there is no other restricting factors.

One element could be environmental protection inspection. So far, news is heard that printing and dyeing plants around Suzhou may cut output by 30%. Polyester plants in Jingyin district could curtail 20-30% production, where polyester capacity is calculated at over 4 million tons. If the policy do carries out, output reduction may reach more than 1 million tons.

Another factor could be fund. Deleveraging in financial sector last year didn't affect much on chemical fiber industry, as the industry was on the rise. Reducing inventory brought faster capital turnover, rising profit generated more cash flow. But in 2018, as deleverage go deeper, impact on entities begin to emerge, primarily, bond yield of listed enterprises rallies, financing cost increases, corporate discount rate of the industry continuously rises. Entering end Q2, some polyester plants start to feel pressure on capital turnover as banks’ finance are tight.

Other than profit and demand, plants maintenance and glitch shutdown could be partly responsible for polymerization rate decline. Some players deem that chance of polyester plants face glitch may lift as lucrative profits made them continuously run at high rates. So far, theoretically speaking, some factors still could contribute some new supply. New capacity side, Shanli plans to start 250kt/year line, Zhongshi II 300kt/year and Huahong 85kt/year lines are also adding supply. Old units restart including Xiangsheng 360kt/year and Cifu 250kt/year lines. Besides, shut plants due to glitch will gradually restart. Of course, delay is also not factored in. Overall, polymerization rate may decline later on, and average O/R is temporarily assessed down to 94-95% in Jul.

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