Polyester production cut prior to the Lunar New Year
China PTA futures have been declining since Oct, not only because of weak economic expectation but also due to investors’ anticipation of sharp polyester production cuts. It is currently anticipated that polyester production is very likely to get curtailed intensively prior and after the Spring Festival (Lunar New Year holiday) in Jan 2023. This point of view is widely held by market participants, as polyester inventory is current at highs while there could be seasonal drop in demand. If polyester producers would like to rein in the inventory, they have to slash production heavily.
Polyester production cut is of high probability. Market participants earlier held the view that polyester plants have to reduce the product inventory to around half a month before the Lunar New Year which starts from Jan 22, 2022, while the inventory is currently at an average of 1 month. It means that during the time of more than 2 months before the Lunar New Year, polyester plants have to reduce the inventory by half a month. In addition, given the expectation of seasonally weakening demand, polyester plants have to begin large production cuts in advance in Nov and continue till the Lunar New Year.
However, the fact is that several direct-spun polyester companies have already reduced operating rates to around 70-80%, and thus they could barely further cut production without shutting down the plants. However, if the plants were to shut, the workers will take the holiday in advance, while it will be too early for holiday. In addition, with a large number of workers returning home for holiday, the resumption of work may get delayed after the Lunar New Year holiday if the pandemic breaks out and then restart of plants may get postponed.
Then, there comes another option. Polyester companies may give considerations to balance inventory control and resumption of work, by postponing the shutdown of plants as far as possible while extending the holiday. Some medium and small sized companies have announced their annual maintenance plan, and according to the schedule, the maintenance would mostly start from mid-Dec or later. In that case, PFY production would not be slashed heavily in Nov at least. Polyester plant operating rate could be higher than expected in Nov, while the operating rate in Feb and even Mar 2023 would be lower than anticipated.
With polyester plants postponing the production cuts, the competition in the industry would intensify with losses worsening. PFY price could further dip in the short term.
