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During the first months of 2021 we have seen a significant
improvement in paraxylene to naphtha spreads - a proxy for
paraxylene margin measurement - compared to spreads in 2020. In
this article, we will explore whether the global paraxylene market
has reached a turning point where profitability returns to the
industry or whether the current improvement is just a temporary
reprieve. We will assess how the paraxylene market reacted to
COVID-19 lockdown restrictions and consider expectations for 2021
and beyond.
2020 Paraxylene Market Performance
To describe last year as highly unusual is an understatement.
According to IHS Markit, global GDP contracted by 3.6% because of
the lockdown measures imposed by governments around the world to
try and contain the spread of COVID-19. The first country to
identify large numbers of COVID-19 cases, mainland China,
effectively contained the virus and was able to re-open its economy
relatively quickly, sustaining uniquely positive GDP growth of
2.3%. As mainland China represents the largest global market for
polyester production, this was positive for paraxylene demand
growth last year. The rest of Asia was impacted negatively by the
pandemic and, consequently, other Asian countries experienced
negative GDP growth, similar to western states. India, as the
world's second largest polyester producer, faced tremendous
challenges containing COVID-19 and its economy contracted by 8.2%
in 2020.
During the pandemic, we experienced stay at home orders,
restrictions on domestic and international travel, the closure of
restaurants, bars, hotels and retail outlets as well as the
temporary shutdown of automobile plants. Many people were either
furloughed from their jobs at reduced pay or laid off completely.
Consequently, we saw significant changes in consumer behaviour
around the world. Initially, there was widespread stocking up of
food and drinks from the grocery stores, leading to outages of
basic products. As inventory was replenished and the lockdowns
continued, we saw good growth for large bottled drinks such as
water or carbonated soft drinks from supermarkets, as well as more
demand for pre-packaged food including fruits, meats etc. due to
heightened sanitation concerns. However, this was offset by reduced
small pack carbonated soft drinks sales as travel through airport,
train stations and gasoline stations was curtailed. However, the
polyester industry benefitted from the installation of protective
screens at stores, increased use of face shields and an explosion
in demand for bottled hand sanitizer, all made from PET resin.
Consequently, there was strong performance in the PET resin sector
of the polyester industry throughout the year. The polyester fiber
industry was more greatly challenged by the closure of retail
outlets, which led to reduced clothes and home furnishings
purchasing, the loss of which was not compensated by online buying.
Automobile plant closures and reduced housing construction starts
also weakened fibers demand. Later in the year, however, the
polyester fiber industry recovered as people started home
renovation projects and passenger car demand improved.
As a result, IHS Markit estimates that the global PET resin
market grew by around 1% in 2020, whereas the polyester fibers
business contracted by 1.2%. An additional boost to the polyester
industry came from reduced use of recycled material in 2020
following the collapse of crude oil prices in March. Virgin
polyester resin was more competitive compared to recycle flakes and
boosted polyester melt production from PTA, creating overall
polyester market growth of 3.3%. Although 2020 polyester growth was
down versus the 2019 level of 5.8%, it was surprisingly positive
when you consider the 2019 growth level came against global GDP
growth of positive 2.6%, whilst 2020 saw global GDP contract by
3.6%. With global economic growth of 5.1% predicted by IHS Markit
for 2021 and 4.2% GDP growth anticipated in 2022, the polyester
market should demonstrate positive momentum in the next two
years.
Paraxylene margins have been mostly negative in 2020
Although polyester and paraxylene market demand has been positive
in 2020, margins have generally struggled and remained in negative
territory, a situation which began in March 2019 when a large PTA
producer, Hengli Petrochemical started up its first paraxylene line
in Dalian, China. This was the first of a swathe of new paraxylene
capacity additions which occurred in mainland China over the last
two years comprising Zhejiang Petrochemical, Sinopec Hainan and
Sinochem Hongrun. In total, almost 12 million metric tons of
paraxylene capacity was added in mainland China during 2019 and
2020 at these four sites, dramatically lifting the country's
self-sufficiency in paraxylene from 47% to 77%, using nameplate
capacity. The global average paraxylene plant operating rate
dropped from 88% in 2018 to just 76% in 2020. There was a slow
decline of the paraxylene to naphtha spread in Asia from $530 per
mt in March 2019 to $260 per mt by December 2019 as each new site
came online in China. Margins swung heavily negative and this trend
continued throughout 2020, putting huge pressure on paraxylene
producers, that was only briefly lifted when energy prices
collapsed in March as the COVID-19 pandemic took hold globally.
By June of 2020, the paraxylene to naphtha spread in Asia had
sunk to a new low of $160 per mt and it hovered at this level until
February 2021. This was a unique situation for the paraxylene
industry as previous periods of global overcapacity had led to
paraxylene to naphtha spreads falling to $250 per mt for just a few
months, followed by the closure of inefficient plants and a
recovery of paraxylene to naphtha spreads above $350 per mt shortly
thereafter. This did not occur during this current downcycle and
sustained low spreads of $150-160 per mt prolonged negative margins
for the industry in 2019 and 2020 and, although some operators
turned plant rates down, producers largely chose to keep making
paraxylene despite the losses. Several factors may have influenced
producers to keep running. The capacity additions in mainland China
were of such a scale that too many smaller plants around the world
would need to close to balance the market again. Additionally, most
producers had contractual commitments to meet. Finally, the
alternative gasoline market for reformate became unattractive in
the first half of 2020 because of the pandemic, as gasoline demand
plummeted, and reformer economics were also negative.
Paraxylene to naphtha spreads climbed dramatically again in
March 2021, rising as high as $295 per mt on a spot basis in Asia
but they have now subsided to around $235 per mt. Various unplanned
outages in mainland China, Vietnam, Japan and reduced rates in
Brunei have created unexpected tightness in the prompt paraxylene
market in Asia. Additionally, the unusual winter storm which hit
the US Gulf coast took most paraxylene plants down in Texas and
Louisiana and these are only slowly recovering, creating a pull on
paraxylene imports from India, the Middle East and Europe. Does
this tightness indicate a turning point towards profitability again
for the global paraxylene market?
Mainland China maintains high paraxylene imports
Despite the commissioning of major new paraxylene capacity in
mainland China over the last two years and an increase in the
country's paraxylene self-sufficiency, imports remained robust in
2020 at an estimated 14 million mt. This is just 2 million mt lower
than the peak of paraxylene imports seen in 2018. The reasons for
this slow reduction in purchases from the merchant market include
technical difficulties during start-up of some of the new Chinese
plants, a continued expansion of massive PTA capacity in mainland
China and low production rates for some existing Chinese paraxylene
units due to negative margins. This gives some hope to paraxylene
exporters, particularly in NE Asia and the Middle East, who rely
heavily on the mainland Chinese paraxylene market. The attached
chart shows the main paraxylene exporters to mainland China over
the last six years. South Korean companies are most exposed to
growing paraxylene capacity in China, followed by Japan and a
number of Middle Eastern suppliers, as well as India.
Path to recovery ahead?
The main determinants to the paraxylene market recovery looking
forward remain supply and demand. As the COVID-19 vaccination
program rolls out across various countries, there is an expectation
that stay at home orders will be lifted and retail outlets will
open once again. Although social distancing will probably prevail,
the polyester market should strengthen as people go back to clothes
shopping. Demand for gasoline should also improve, giving
paraxylene producers a more attractive outlet for reformate if they
choose to shut production of aromatics. The inventory build
experienced in the paraxylene market will take some of the
anticipated growth out of 2021's demand as stocks need to be worked
down, yet IHS Markit still expects polyester growth of 3.0 % this
year followed by 4.5% growth in 2022.
However, excess paraxylene supply will continue to dominate the
landscape over the next two years. In mainland China, Zhejiang
Phase II will be commissioned this year, possibly as early as the
summer, possibly adding up to 5 million mt of paraxylene capacity.
Additionally, we expect CNPC Jieyang to deliver a 2.6 million mt
facility mid-2022 and Shenghong Petrochemical may be able to bring
online their new 2.8 million mt facility by the end of 2022.
Outside of mainland China, Saudi Aramco is expected to start an 800
kt paraxylene unit in Jizan, Saudi Arabia in the second half of
2021. Consequently, with an expected 9 million mt of additional
paraxylene capacity operational in the next two years, IHS Markit
foresees a further softening of the nameplate capacity global
operating rate to just 72% by 2022. This will have significant
consequences for paraxylene margins.
IHS Markit forecasts that margins will remain negative for
paraxylene producers for the next several years and the amount of
existing capacity needed to close to compensate for new investments
in China indicates significant market restructuring. Although
spreads have recently improved to $235 per mt again, it is likely
that spreads will collapse to $150 per mt once Zhejiang phase II
offers large commercial quantities of paraxylene to the market.
This will create further industry pressure and may lead to
different decision about whether to continue producing in 2022 for
many companies.
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