New capacity additions and US-China trade war make for uncertain p-xylene market

Para-xylene (PX) is a high value, transportable chemical produced from heavy naphtha. It is one of two important feedstocks for the polyester chain (the other is monoethylene glycol, MEG), and demand for it has been rising steadily, especially in China, India and Indonesia. China consumes more than half of all PX produced worldwide and imports more than half of what it consumes.

At a fundamental level, PX demand growth parallels that of polyester in all its forms – as fibre, bottle and film (in that order of importance) – but the business has its own idiosyncrasies that have made for challenging times. More may be around the corner.

The polyester value chain

The polyester value chain starts with PX, which is obtained from the aromatics present in crude oil, and is produced in refineries and petrochemical complexes that crack naphtha. PX is the single most important aromatic, and there are several technologies aimed at to maximising PX production, including by the conversion of other aromatics – specifically toluene – into PX.

The second step in the polyester value chain is the conversion of PX into purified terephthalic acid (PTA), a dicarboxylic acid, which, in the third stage, is reacted with MEG to produce polyester resin. This resin can then be converted into a variety of forms – fibre & filament yarn, bottle and film.

One of the key developments in the industry in the last few decades has been the scaling up of plants to benefit from economies of scale and their integration back to feedstock so as to capture value all across. This is now seen as key to competitiveness in a challenging marketplace. In India, Reliance Industries Ltd. (RIL) runs integrated polyester operations that go all the way from PX production through PTA (and MEG) to polyester fibre (and even apparel) and bottle grade resin.

PX-naphtha spreads traditionally hover between $400-45 per tonne, but can spike to as much as $600. Breakeven with modern technologies is now <$200 per tonne. It is more often than not cheaper to produce than to buy.

Polyester growth trends

Global demand for fibre (natural and synthetic) has a strong correlation to GDP growth and the two have been rising since the turn of the century in sync. Polyester fibre demand has, however, outpaced GDP, taking share from other fibres, including cotton, due its low price and versatility in apparel use. Between 2012 and 2016, when global GDP growth hovered between 2.4-2.8%, total fibre demand also grew slower than in the previous decade. In 2017, when global GDP grew 3.1% as emerging economies came out of their recession and mature economies performed stronger than expected, total fibre demand surged by 6.3%, as pent-up demand was unleashed. In 2018 too, the strong growth was repeated: fibre demand grew by 4.9%, even as world GDP grew by 3.2%.

In 2016, global demand for all fibres crossed the 100-mt mark, and now hovers around 110-mt. Polyester is the dominant fibre in the world today, accounting for a little less than half of this demand (about 52.3-mt), with cotton – the second most important– relegated to a distant second place with a roughly 25% share of the overall fibre market. To be sure there are places, like India, where cotton still has a dominant share of the fibre market, but the global trends point to the direction that India too will take given the constraints on land (for growing cotton), its cost structure, and the limited functionality it offers.

Policy impacts

2017 saw some new developments that led to a surge in demand for polyester fibre. The Chinese government, as part of its National Sword Policy, banned the import of recycled plastics, including PET bottles. The ban, which came into effect from January 1, 2018, resulted in the elimination of nearly 250-kt per month of recycled PET resin imports, which went to make polyester staple fibre (PSF). This meant that the incremental demand for polyester resin had to be met by domestic virgin production. As a result, demand for PTA soared by 4-mt in 2018 and PX demand by 3-mt.

Smart recovery in 2018

From the supply side, PX markets saw limited capacity additions in 2018. New plants in Saudi Arabia (PetroRabigh, 1.35-mtpa PX capacity) and Vietnam (Ngi Son, 0.7-mtpa PX capacity), which were due to come on stream in 2017 were delayed into 2018 and suffered start-up difficulties that limited output during the year. Furthermore, there were delays at the giant China projects: Fujian Fuhaichuang did commission a 0.8-mtpa PX plant in end-2018, but the second line was started up only in March 2019. In India, RIL commissioned a 2.2-mtpa of additional PX capacity at Jamnagar in 2017.

Due the strong demand growth and the limited capacity increments global average operating rates for PX plants rose to 88% in 2018. This has improved margins from the dismal days of 2015, when only integrated producers in Asia with captive availability of mixed xylene from refiners benefitted. Those who were depended on the merchant market for mixed xylene purchases or using extracted toluene for trans-alkylation units faced the brunt of the challenging market conditions. The healthy market conditions have prompted some restarts of mothballed capacity (for example, Indonesia’s TPPI PX unit), but have had a negative impact on the downstream polyester industry. Many polyester fibre and PET resin producers are seeing cost escalations that they are unable to pass on to their customers.

Uncertainties in 2019

The PX market faces several uncertainties this year. The US-China trade war has spooked markets. If things go from bad to worse a 25% tariff on polyester clothing exports from China to the US could result. While it will not eliminate exports – given the importance of China as a supplier – it will have certainly dent the numbers.

Despite this, IHS Markit, a consultancy, sees overall polyester growth at 4.8% in 2019 – a modest, but noticeable decline from the growth seen in 2018.

Another factor that could significantly alter PX markets is the new capacity coming online. The recently added new capacity in China should operate at a higher rate this year, but the year will also see the commissioning of two large crude oil-to-aromatics complexes at Hengli Petrochemical and Zhejiang Petrochemical. Their incremental output alone could be around 3-mt – far higher than the incremental increase in demand expected this year. As a consequence, global PX operating rates are expected to decline to 83%, with a further decline expected in 2020.

Not surprisingly, PX markets have already fallen in 2019, with worse to come in the next year. Non-integrated producers in North East Asia are at most at risk, as they will have the additional burden of high energy costs and face increased exports from the low-cost producers in the Middle East.

The scenario painted above may change if there are unanticipated delays or technical issues with the giant China projects, or if the US-China trade war is amicably resolved and polyester demand goes back on the high growth track of the recent past. If polyester demand in 2019 returns to the 2018 level it will add about 2.5-mt to global PX demand and lift operating rates to 86% in 2019 and 82% in 2020.

Clearly the markets will want close watching.

New investments needed in India

India is currently a net exporter of PX, mainly to China and South East Asia. But with fast growing polyester demand, India could be deficit by PX by 2023, unless new investments take place. The new refinery for the west coast of India is an option for this, as it has the scale to help competitiveness.