PET Chain Hit by Economy and Growth in Recycled Market

With a triple whammy of low demand, continued growth in recycling, and new capacity coming onstream, the outlook for PET is challenging to say the least

The global economic downturn has taken a heavy toll on thepolyethylene terephthalate (PET) chain, with producers feeling the pressure from both upstream and downstream. The record high oil prices of 2008 led to volatile feedstock prices, while recession and uncertainty weakened demand. The dramatic increase in PET recycling further impacted demand for PET feedstocks.

Especially hard hit in 2008 were the West European and North American PET bottle grade markets, which faced a major reversal in consumption growth. Having previously averaged growth of more than 5%/year in each region, demand dropped sharply due to a combination of high derivative prices, de-stocking, lower household expenditure and light-weighting. The mineral water sector was hardest hit in 2008, as a result of reduced household expenditure on items deemed to be non-essential, and increasing criticism over environmental concerns.

CAPACITY UP, CONSUMPTION DOWN

The cyclically high operating rates and favorable market conditions enjoyed in much of the PET chain from 2005-2006 have resulted in new capacity, which came to market in 2008, unfortunately coinciding with the downturn in demand.

A dramatic increase in PET recycling has further impacted on demand upstream. High prices contributed to a doubling in PET recycling over the past four years, to 6m tonnes in 2008. And recycling will continue to increase, despite the recent collapse in prices. Most growth has been in the recycling of post-consumer PET bottles into fiber. China accounts for around three-quarters of global recycling, leading the market both in terms of its own recycle rate, and in the import of post-consumer PET from other regions.

The combined effects of PET recycling, lower demand growth and capacity additions, forced PTA operating rates down by 5% in 2008. Consumption growth fell to 3%/year, the lowest level on record, while capacity additions over the past two years totaled 5.6m tonnes, representing a 13% increase over 2006. Nearly 9m tonnes of new capacity is currently under development, which will further depress operating rates until 2011-2012.

The substitution of dimethyl terephthalate (DMT) by purified terephthalic acid (PTA) accelerated over 2007-2008. DMT-based consumers lost competitiveness due to the ageing of their facilities and the higher energy costs incurred in polymerizing DMT. Global DMT demand fell by more than 10% in 2008, and producers in Asia and Europe were forced to exit the market, taking out nearly 500,000 tonnes/year of capacity.

Monoethylene glycol (MEG) consumption experienced a slowdown of unprecedented severity in 2008, with global growth falling below 1%, hit by weakness in both the PET and automotive sectors. Meanwhile, operating rates fell by 5% in 2008 due to significant capacity additions in the Middle East and Asia-Pacific. A further 3m tonnes/year of capacity will be added over the next two years in the Middle East. The coincidence of this expansion and low demand growth will accelerate the long-anticipated closure of laggard plants in other regions.

The bankruptcy of Wellman, the long-standing US PET resins and fiber producer, illustrated the inability of much of the installed capacity base to generate profits. Only fiber producers with a genuine specialty portfolio appear to have a future in developed regions. Many loss-making PET assets have been offered for sale, but very few buyers have access to the credit required to take them on.

Despite the current market situation, there remains substantial long-term growth potential. Central and Eastern Europe, and Africa will grow at the highest rates. Asia-Pacific has low rates of per capita consumption of both PET resin and textiles, and thus has the greatest long-term growth potential. The contraction in PET demand in North America and Western Europe in 2008, however, heralds a phase of much lower growth rates in both regions. Investments will now focus on integration and the pursuit of cost leadership rather than market share. The shakeout among producers will continue, but with little appetite for the acquisition of distressed assets.

Companies with established production in the Middle East and Asia, and less exposure to ethylene and derivatives, are the most likely to make it through the trough intact.

This article originally was published by ICIS.

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