Cost Pressure Hurts Chemical Fiber Sector     

The constant oil price rise in the international market in recent years has directly or indirectly triggered a drastic price rise of all commodities worldwide and in turn led to a global cost increase of raw materials. In the chemical fiber sector, raw materials hold a very high proportion in the production cost. For example, in polyester fiber PTA and MEG account for more than 80% of the production cost and in viscose fiber pulp also accounts for more than 60% of the production cost.
   Due to the surplus capacity of conventional varieties and the fierce competition in market, the chemical fiber sector in China, especially the synthetic fiber sector, has weak cost shifting ability. Because of the sustained high price of crude oil and the overall price rise of petrochemicals, the synthetic fiber sector is always faced with high raw material cost. The rising raw material cost has swallowed the already thin margin in synthetic fiber producers and become a pressure that synthetic fiber producers are unable to bear.
   Synthetic fibers include polyester fiber, acrylic fiber, polyamide fiber, spandex fiber and polyvinyl alcohol fiber. Their raw materials include PTA (pure terephthalic acid), MEG (mono-ethylene glycol), acrylonitrile, caprolactam, PTMEG, MDI and polyvinyl alcohol. Prices of these raw materials increased more or less in recent years.  
   Due to the combined impact from the brisk demand in regional markets, the depreciation of U.S. dollars and factors of geographical politics, the price of crude oil in the international market keeps going up and creates historical records time and again in 2007.
   MEG as one of the raw materials for polyester has a supply shortage and a skyrocketing price rise. The price of MEG increased from less than RMB9 000 per ton in 2006 to more than RMB12 000 per ton in August 2007. It went further up with the oil price rise to more than RMB15 000 per ton after November. The price of DEG (diethylene glycol) in China was at its lowest of RMB8 020 per ton on March 20th, 2007 and increased to a historical high of RMB14 700 per ton on November 8th.
   The price trend of PTA is however deviated from MEG. The average price of PTA in China reached its highest of RMB8 800 per ton on May 28th, 2007. It dropped all way to RMB7 100 per ton at the end of October 2007. In spite of a pickup after November, the price is only RMB7 300 per ton today. Main reasons for such price trend include the completion of new projects, the adequacy of supply and the slackness of the downstream polyester sector.
   At the time of the rising raw material cost, the price of synthetic fibers has failed to make a synchronous increase due to the supply surplus. The profit in the synthetic fiber sector has therefore always been maintained at a low level.
   From January to September 2007 the output in the synthetic fiber sector increased by 18% whereas the gross profit rate and the profit rate were only 6.86% and 2.73%. The gross profit rate and the profit rate were 5.39% and 1.82% in the polyester fiber sector, 7.67% and 3.02% in the polyamide fiber sector and 8.41% and -3.67% in the acrylic fiber sector.
   The price rise of MEG has caused a constant reduction of the operating rate in polyester producers. It will also lead to a cost increase in polyester fiber producers in the next few months. The profit-earning ability in the polyester fiber sector will likely go down in the fourth quarter of 2007. The unduly high price has already increased risks in MEG trade. With the delivery of increased supply from South Asia and the production restoration of overhauled units, the supply shortage of MEG will be eased and MEG price will surely go down. Due to the forthcoming completion of the 1.45 million t/a PTA unit in Taekwang of Korea and the PTA unit in BP Zhuhai, the price of PTA will likely have no increase before the end of the year.