Polyester Market is Bottoming

Divergence appeared on polyester upstream and downstream markets since last week. On the one hand, domestic commodity futures price generally moved up after interest rate raises expectation temporarily eased and global commodity strengthened. Moreover, PX spot price continued to rebound due to units’ breakdown and PTA/MEG supply in H1 2011 is still expected tight, so PTA spot and futures price firmly climbed up. On the other hand, owing to slack end-users demand, PET chip and PFY price continued to move down and most products were around cost line. Though possibility of further drops is slim, the market is still bottoming as the end-users demand is in valley and market rebound only last for short term.
　
1. The expectation of rate hike eased and domestic commodities climbed across the board, pushing PTA market to rebound.
Dec 10, China Central Bank raised deposit reserve ratio for the sixth time this year instead of hiking interest rate. The worries of imminent rate hike lessened and major commodities generally climbed last week. For instance, cotton future 1109 increased by 4.05% pushed by strong international market. Copper and rubber also got close to previous high levels. PTA futures climed by 2.895%, from 9530yuan/mt to 9836yuan/mt. However, other commodities were still weak. Actually, this round of rising wave was largely driven by macroeconomic factors rather than market fundamentals. As to PTA market, there is concern that availabilities will be tight in the first half of 2011, thus cargo holders were not under the pressure to sell. Therefore, spot prices saw strong rebound.

Market changes of major commodities last week

Commodity	Openning	Closing	Change	Change
PTA1105	9530	9836	+306 yuan/mt	2.89%
CF1109	26590	27845	+1085 yuan/mt	4.05%
Cu1103	67770	68430	+650 yuan/mt	0.96%
L1105	11880	12350	+485 yuan/mt	4.09%

2． PTA spot availability is expected to be tight in the first half of 2011
There are still many new PTA projects after 2010. According to our survey, about 3.7 million tons PTA capacity will be put into production next year, but the most of them are in the mid or late 2011.　On the contrary, the new polyester capacity in the first half of 2011 reaches about 2 million tons. Moreover, PTA plant operating rate has already been in high levels in 2010 and the further increase will be very limited, so the PTA supply in H1 2011 will be tighter than H1 2010.

On the other hand, under the sufficient liquidity and inflation, PTA shows strong downward resistance. Some traders built stock at low prices despite capital pressure; while the polyester producers, due to sluggish sales and high inventory, showed little buying interest. PTA market is likely to remain range-bound recently.

3. Polyester products shivering at bottom
Down from the highest point in Nov, profits of PFY products were gradually squeezed with shrinking trading volume. Market sentiment turned weak and sales ratio averagely lingered around 50-60%. PFY inventory in Zhejiang plants reported up to historic high of about 16-20 days. As for profits, FDY, POY and PET fiber chips, except finer FDY and POY, already faced losses of about 200-300yuan/mt. However, downstream operating rates kept lowering. Though a few plants began to stock up moderately, market confidence was still under recovery. With the year end approaching, plants were inactive to stock up in bulks. Suffering from high inventory, high cost but shrinking demand, some PET fiber chip plants started to cut production. Around the year end, market will still shivering around the bottom. In the short term, rigid demand may show in the end of Dec and traders may make profit-taking, PFY demand may warm up a bit.

For policies, with monetary policies tightened as predicted, although the market is affected by the possible raising of interest rates somehow, the predicted raising of interest rates delays as CPI is supposed to come to downtrend. In spot market fundamentals, although prices still presented sluggish, the market confidence is recovering. As the market is stepping into the yearly bottom period, the operating is hard to be continuous. For speculative elements, a lot of traders with little interest to build up stocks in large volume before the holidays think the prices of PTA and MEG have not been adjusted to the safe edge. For downstream polyester products, transactions recover gradually in short time, but as the market is also lack of effective speculative chances, plants could reduce stocks properly when prices are low. As Spring Festival is on the way, the market trend is supposed to be not continuous and substantial market changes will not probably to appear. The market is still fluctuating in bottom.