PET industry participants in Europe and North America are locked in a fight for survival. What can the PET sector do to improve its outlook for 2024? What are the key factors in improving PET operating rates going forward?
Increasing final demand for PET products is one key factor—closely related to wider economic and business landscapes. The outcome of ongoing competition regulation is also a contributing factor. Lastly, the future development of protectionism measures, and their impacts, will be key.
But ensuring reasonably low paraxylene (PX) price gaps with Asian imports to the US and Europe is vital.
Producers of raw materials (PTA, MEG, PIA) are experiencing the trickle-down impact of low PET operating rates in these two western regions. And, in the absence of exceptional demand moving forward—and reductions to imports—rationalization of the chain is expected.
The other side of the dilemma is tied up with the threat of polyester chain companies making low value feedstock (PET, PTA) available to downstream converters including PET bottle blowers. Access to the raw materials PTA and PET at low cost improves the competitiveness of downstream industries.
Europe:
North America:
With Asian product available to North American buyers at a cheap price, and minimal reductions to North American producers' prices, it's easy to grasp how threatened the latter producers feel right now.
Recent PX settlements in Europe appear to give confidence that the price gaps may be reasonable in 2024.
Tecnon OrbiChem business manager Javier Rivera
Upward pressure on PX prices from gasoline markets is likely to feature during 2024—in the US especially. However, recent PX settlements in Europe appear to give confidence that 2024 price gaps may be reasonable.
This situation leads to a price gap (also referred to by industry participants as a disparity). PX disparity Europe/US versus Asia is defined as “PX contract price in Europe or the US versus monthly average of daily PX fob South Korea in the same month".
When cheaper products and raw materials enter Europe from China for example, buyers can opt for cheaper product for their inventories. However, they must weigh up the benefits of taking advantage of the arbitrage against the risks of giving up reliable supplies from local producers. It's true that Chinese producers are eyeing European and North American markets for customers today, but when the country's domestic markets recover exports may reduce.
When there is high disparity between the price of a locally produced product and the same product entering a country—or region—from elsewhere in the world, an arbitrage window opens.
When it comes to PET markets, high PX disparities versus Asia increase the cost of producing PTA/PET relative to that in Asia and create an arbitrage window for PX, PTA and PET imports.
The above graph illustrates PX price differences between Europe and North America versus Asia. Traditionally, Asia's fob South Korea PX values were the key reference for PX settlements in other regions. That changed in Q2 2022.
Asian PX values lost their benchmark relevance to North American and European PX settlements when gasoline market dynamics took over as the main driver.
Specifically, there has been an increased demand for mixed xylenes in North America based on suitability as gasoline blendstock. That demand growth has underpinned a sharp price increase. Particularly during 2023, strong demand for gasoline and transport fuel has applied upward pressure to the gasoline blend and mixed xylenes values. Therefore, PX price settlements, which are linked to mixed xylenes prices, are in turn based on the premiums that mixed xylenes can obtain from gasoline/blend markets. The drivers of those markets are completely different to those of polyester, PET and packaging.
A high level of PTA (and its derivatives) imports—specifically PET—was among the consequences of the low prices of Asian compared to locally produced PX in 2022 and 2023.
The knock-on effect is a reduction in regional producers' market share, concurrent with softening end demand as the world teeters on the edge of recession.
However, high inventories throughout the chain have largely been consumed so far in 2023. As producers and convertors look to restock for 2024, price points for purchases remain key to business profitability. The graph below (click to open in a new window) shows that paraxylene prices are subject to a downward trajectory in the latter part of 2023. Subscribers to our chemicals data and market intelligence platform OrbiChem360 have access to eight PX price points globally.
Some critical aspects to assuring the competitiveness of the European PET sector have clearly improved. PX disparities and energy costs have diminished. However, end-demand and PET requirements from European sources continue to suffer the consequences of high disparities and high energy in 2022, along with changes in consumer habits and the end of the peak season.
The structural changes to consumption habits of the previous couple of years—namely the exceptional PET consumption during the pandemic—have disappeared. End-demand is significantly reduced compared to previous years, which we should now consider exceptional.
In 2023, producers have been forced to decide between volumes and reasonable margins, which have been impossible to achieve together at the same time.
Javier Rivera
In 2023, producers have been forced to decide between volumes and reasonable margins, which have been impossible to achieve together at the same time. Low demand in the coming weeks could prioritize margins versus volumes for the remainder of 2023.
Structural changes are taking place and there is no clarity on when final demand will increase, to what extent, and how sustainability. Changes in consumer habits, in the way of life and many other factors will impact PET markets.
Rationalization and consolidation within the polyester chain is expected. Critical to evaluating positions for 2024 and beyond will be each individual company's competitiveness, integration, financial strength and medium to long term strategies.
High and structural PX price gaps (and delayed settlements), high imports and low demand for PET products are the main drivers of the current PET market in Europe and the US. These remain PET producers' key concerns for 2024 and additional reasons to justify the Corpus Christi announcement.
It remains to be seen what the effects of the current rationalization of PTA and PET will have on purchasing and commercial strategies of individual producers/buyers in the PET chain.
While fundamentals for the PET industry remain challenging and the market depressed, there are signs of improvements for 2024. Achieving better outcomes is unlikely to be difficult (relatively speaking) since "2023 has been described as the worst year ever, especially for PET producers in Europe with low margins/low operating rates," says Rivera.
There is evident uncertainty about the PET requirements that buyers could commit to due to uncertainty as regards end-demand.
The number of import options is expected to be reduced in 2024. Imports from countries where domestic producers have other units are significant, especially in the US, with a figure between 65-70% of total imports in 2023.
In Europe, it appears that freely negotiated or market related contracts are the preferred option. That scenario could change. It depends upon how European producers capitalize on the provisional anti-dumping measures, the JBF closure (if any) and existing rationalization via lower operating rates.
The low prices and poor margins of recent months are not sustainable. Producers are now focused on prioritizing reasonable margins over volumes. The need to guarantee minimum volumes in 2024 will surely lead to different commercial approaches, says Rivera. "The consensus is that buyers should rely more on European sources compared to 2023," he says.
In the US, a highly contractual market, a complete change in market dynamics compared to the same period last year is expected to result in significant declines of between 5-8 c/lb in PET adders/deltas over raw materials for contractual deliveries compared to 2023.
In the medium-term, the need to incorporate 25% of recycled material in beverage bottles in Europe is a threat for consumption of virgin PET. Current low prices of recycled material could accelerate the trend in 2024, which along with new capacities and improved availability could penalize the usage of virgin PET.
Javier Rivera and our South Korea-based consultant Hyun-Min Kim (Min) scrutinized Europe's response to an anti-competition allegation against Chinese importers of PET earlier this year. Read the blog post PET Anti-dumping Update: Proposed Provisional Duties which includes a free-to-download eBook.