Highlights of a strong growth market – Polyester fibers & PET

Confidential. © 2018 IHS MarkitTM. All Rights Reserved.Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

22 March 2018Hilton Americas | Houston, TX, US

Highlights of a strong growth market –Polyester fibers & PET

Ashish PujariExecutive Director, Aromatics & FiberPolyester Fibers & PET

Polyester has today become an inseparable part of our daily lives, across all regions and social strata. China has dominated the growth in this industry in the past 20 years and alone accounts for more than 70% of the global market share. The textile industry is labor intensive and low wages and high productivity attracted invested in China. On the other have, bottle grade PET production costs are more or less same across the world, but the fast demand growth and easy availability of raw materials has helped drive most of the new investments into Asia.

Although bulk of the industry in now in Asia, its integration with other streams like olefins and refining means that any changes in polyester outlook continues to have global ramifications. The global integration is not only on the upstream side, but even in the downstream, PET recycling has now become a globally integrated industry, with China accounting processing almost 75% of global PET waste.

The industry saw sub‐par demand growth between 2012 and 2016 leading to the poor margins for a considerable period of time. However, with crude oil prices bottoming out through 2015 and continuing to move up over the last 2 years, the industry is witnessing a strong rebound in demand as well as margins. China’s new policy on imports of PET waste has put extra pressure in virgin polyester fibers, but is also expected to put pressure on global recyclers now.

Polyester industry is set for a strong 2018 – both for demand and margins, but there are developing mid term concerns which one needs to watch out!

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Confidential. © 2018 IHS MarkitTM. All Rights Reserved.

Polyester has seen anaemic growth rates in past 5 years

Questions raised as confidence shaken

• Short-term phenomenon or new trend line?

• Reasons for slowdown

• Did market overestimate polyester potential?

• Has demand moved back to cotton?0

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CIS & Baltics Africa Middle East Indian Subc.

NE Asia SE Asia Capacity

Global Polyester Melt Capacity & Demand Growth

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ons

Source: IHS Markit © 2018 IHS Markit

5% 5% 4%4% 3%

7% 2% 2%9%8%

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Polyester businesses passed through an extended downturn

• Investments plans made at start of decade -when margins & demand were strong

• Rise of PTA MegaTON in 2012 weighed down margins, not only for PTA but also polyester

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Return on Investment

Percentage,POY – Return on Investment

© 2018 IHS MarkitSource: IHS Markit

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Signs of recovery were already evident in early 2017

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What we’ll cover today

PET

Recycling

Polyester fiber

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PET recyclingChinese National Sword policy has a global impact

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PET growth attractive; but handling waste is growing concern

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Bottle Collection PET Consumption

Globally - waste collection has grown faster than virgin PET demand

Source: IHS Markit

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• Brand leaders continue to set big recycling goals

• Some legislation also promotes “Bottle to Bottle” recycling

• Costs currently prohibiting big growth in this field

• Recycling back into fibers tends to be most cost effective way to recycle post-consumer waste of polyester

Staple

Textile Filament

BCF

Spunbond

Industrial Filament

Film

PET Resin

Other Recycle Demand

Recycling demand segments


Fiber takes lion’s share in recycling

2017 global demand: 7.2 million metric tons

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Polyester recycling – caught between economics & regulation

Imports43%Domestic

57%

PET recylate processed in China


2017 estimated processed volume: 5.1 million metric tons

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Domestic PET Consumption Recylate Collection

China’s own recycling standards faltering!


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Crude Oil Virgin Recycle

Polyester Chip Price: Virgin vs Recycle

Source: IHS Markit

Polyester Chip Price: Virgin vs Recycle

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China - Polyester chip price: Virgin vs recycle

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© 2018 IHS Markit

Economic incentive primary driver for consuming fibers from recycleDiscounts over virgin PSF dropped to lowest levels after China’s ban on imports of PET waste as supply has tightened

Differential

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Recycled polyester has become an important source for staple fiberChina’s ban on import of polyester waste expected to benefit virgin fiber industry in 2018

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PSF Total PSF from Recycle

Global PSF Production: Virgin vs recycled

Source: IHS Markit

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row

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Virgin fibers Recycled fibers


Global Fiber supply growth: Virgin vs. recycled

Policy measures delay growth of recycling, but economics favors more recycling

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PETMost producers see better days, as few majors falter

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PET is globally well spread out, with most regions having the flexibility to meet own demand regionally

Europe MDE/AFRN. America S. AmericaCIS & Baltics ChinaNon-China Asia Southeast AsiaIndian Subc.

27.4 Million Metric Tons

PET


PET Capacity


PET


PET capacity




PET


PET Capacity


PET


PET production




PET


PET demand


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…yet PET remains a widely traded product

• Asia continues to be in surplus, led by continued capacity growth in China

• Latest technology and integration with upstream helped Asian producers remain cost competitive in global surplus market

• Tariff and non-tariff trade barriers most actively used against PET trade in past few years

• Barriers will alter trade flows – but not reduce it in long term

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Regional PET net trade

Forecast

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DAK Americas

35% Mossi & Ghisolfi

28%

Indorama Ventures

29%

Nan Ya8%

Capacity = 4.8 Million Metric Tons

North America: PET bottle resin producers


Indorama Ventures

23%

JBF RAK LLC15%

Lotte Chemicals UK

14%

Equipolymers13%

Novapet9%

M & G Polimeri7%

Others19%

Capacity = 2.6 Million Metric Tons

West Europe: PET bottle resin producers


Temporary stoppages as 2 largest producers face bankruptcies; operations remain below capacity until today

North America & Europe supply faced disruptions in 2H 2017

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NAM SAM USA NEA SEA JAPISC WEP CEP AFR CIS MDE

PET: Exports from China

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Trade barriers altering trade flows, overall trade volumes still increasing

Asian exporters have benefitted from global supply disruptions

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Global supply disruptions have pushed up spreads since late 2017

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PET Spreads


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• European and US spot margins spiked in 2H 2017 as significant capacity outages led to shortages during the peak demand period

• Europe & US markets primarily trade against annual contracts, agreed pricing formulas for 2018 indicate a healthy increase in spreads

• Asian export spreads are usually at cash break-even levels, but these have also increased through 2017

• Domestic spreads tend to be higher, due to tariffs and non-tariff barriers

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PET: All developing markets continue to show strong demand growth

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PET: Per capita consumption vs demand growth

Source: IHS Markit

Demand CAGR (2017 – 2022)

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© 2018 IHS Markit

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Global PET capacity growth

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• In past couple years, demand has increased faster than capacity

• In 2018, expected capacity addition to far outweigh projected demand growth!

PET capacity addition accelerates in China

However, with only China adding capacity, will it be able to meet growing demand in other regions?

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US PET trade story – from deficit to surplus

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NAM SAM NEA WEP ISC SEA MDE AFR Net Trade

PET: US exports & imports

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Imports

Exports

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Polyester fibersBroad-based economic growth leads to revival in fibers demand

Credit: Shutterstock

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2015

Total Natural and Man-Made Fibers

Source: IHS Markit © 2018 IHS MarkitGDP (Billion 2010 $)

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ers,

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Fiber: World demand vs global GDP

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Economic growth drives fiber demand – polyester takes largest share of growthTotal fiber demand is estimated to have increased by 6% in 2017, fastest since 2010

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Global Fibers mix – dominated by polyester & cotton

Polyester49%

Cotton26%

Olefin10%

Cellulosic6%

Nylon4%

Acrylic2%

Other Synthetic Fibers1%

Wool, Silk & Linen2%

Polyester

Cotton

Olefin

Cellulosic

Nylon

Acrylic

Other Synthetic Fibers

Wool, Silk & Linen

World fiber demand in 2017


2017 total fiber demand: 101.7 Million Metric Tons

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Fibers provide one of the basic necessities

2017 total fiber demand: 101.7 Million Metric Tons

Apparel51%Home Furnishings

25%

Industrial12%

Non-woven12% Apparel

Home Furnishings

Industrial

Non-woven

Fiber: World demand 2017 (by application)


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Europe MDE/AFRN. America S. AmericaCIS & Baltics ChinaNon-China Asia Southeast Asia

World: Total Polyester Fiber Demand (2017)


Polyester fibers demand…heavily skewed towards China

• In 2017, China alone accounts for

• 66% of global demand

• 71% of global production

• up from a 25% share in the year 2000

• In total, Asia accounts for 86% of global demand.

• Lower labor costs initially attracted investments in the textile sector in Asia.

• Fast developing economies, rapid urbanization and strong growth in disposable income is now sustaining the growth in regional textile industry.

2017 demand: 49.8 Million Metric Tons

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Investments run counter cyclical to margins

• Excessive capacity growth between 2011 and 2016 put severe pressure on polyester margins

• Demand accelerated in 2017 as capacity growth stagnated, resulting in a quick increase in product margins

• 2018 outlook is anticipated to be similarly positive, but continued profitability is expected to result in excess capacity buildup again!

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Polyester filament supply-demand and margins


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X:\GFFR\Charts and Presentations\Polyester Chain\HANDOUTS\Excel & Charts\WorldBook‐SDcharts\Current\PTF_SDgrph18T.xlsbWS: WLD (CC92 to CQ108)

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World: Total polyester fiber demand growth (2012-2022)


5% 4% 4% 8% 6%5% 2%

Polyester growth bounces back in 2017Aided by healthy economic conditions, growth expected to be strong in 2018, but eventually slow down to trend line

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Polyester expected to show strongest growth, others grow moderately

Cotton

Polyester

Nylon

Olefin

Cellulosic

AcrylicWool, Silk & Linen

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Fiber: 2017-2022 demand growth

Source: IHS Markit

2017 Demand (Million metric tons)

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17-2

022)

© 2018 IHS Markit

GDP 2017-2022

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Textile industry on the move to lower costs

• Labour, not raw material, accounts for largest costs in a finished garment

• China’s labour costs are no longer at lowest levels and continue to increase rapidly

• Downstream industry already started to move to low cost areas

• Will not be surprised to see new polyester investments in under-developed regions

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Labor cost change (2012, 2017 and 2022)


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Key takeaways

Demand growth expected to be strong in 2018

Fastest growing fiber for many years to come

Polyester fibersMarkets expected

to remain tight through 2018

Increasing brand owner focus on

recycling

PET

Sudden policy changes affect

short-term growth

Newer recycling avenues expected

in longer term

Recycling

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Contact details

Ashish PujariExecutive Director \ Aromatics & Fibers

+65 6439 [email protected]

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IHS Markit Customer [email protected]

Americas: +1 800 IHS CARE (+1 800 447 2273)

Europe, Middle East, and Africa: +44 (0) 1344 328 300

Asia and the Pacific Rim: +604 291 3600

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Highlights of a strong growth market – Polyester fibers & PET