Rising operating load may stifle PTA rebound

Affected by the rebound in crude oil prices and loose funding, PTA prices rose sharply in March, successfully breaking through the upper edge of the previous downward channel. Looking at the market outlook, as the operating load of PTA manufacturers increases, the rising momentum of PTA will gradually fade away.
Oil prices may return below $40/barrel
The main reason why international crude oil prices stopped falling and rebounded was the production freeze agreement between OPEC and Russia. Although the crude oil production of OPEC and Russia reached its peak in January, and the production freeze did not have much effect on alleviating oversupply, OPEC and Russia began to cooperate on oil price issues. On the one hand, it shows that both parties intend to stabilize oil prices; on the other hand, it also shows that The ability of oil-producing countries to resist low oil prices has reached its limit, which sends a positive signal to the market.
However, the Western oil embargo on Iran has just ended, which makes Iran join the production freeze agreement is tantamount to continuing to impose oil embargo sanctions on Iran. Therefore, the inconsistent interests determine that the production freeze agreement cannot be a turning point in changing the trend of crude oil. The rise in crude oil is largely due to the impact of the production freeze agreement on market psychology.
The production freeze meeting originally planned for March 20 may be postponed to April. In addition, Iran said in mid-March that it would not consider freezing production until its daily output returned to 4 million barrels, while Russia said it expressed understanding and support. OPEC’s March monthly report lowered its global crude oil demand forecast for this year to 31.5 million barrels per day, a decrease of 100,000 barrels per day from last month’s forecast and an increase of 1.8 million barrels per day compared to 2015. This has greatly reduced the market’s expectations for the later oversupply to ease. Crude oil may return to below US$40/barrel, and PTA’s cost center of gravity may shift downward.
PTA industry’s operating load increases
Depending on the size of the enterprise, the processing fees of PTA enterprises range from 400 to 1,200 yuan/ton. The author chooses a processing fee of 400 yuan/ton to calculate the production cost of PTA, which can better reflect the cost status of larger enterprises and fully reveal the profit and loss status of the PTA industry.
We found that the operating load of PTA companies and industry profits show a relatively good negative correlation. When profits are high, the operating load is often low; while when losses are large, the operating load is often at its peak. In fact, the PTA industry is currently trapped in such a cycle: due to the overall overcapacity of the PTA industry and sufficient market supply, as the price of PTA rises and the operating conditions of enterprises improve, enterprises that have stopped production in the early stage will start to operate one after another. As the operating load of enterprises increases, supply pressure gradually increases, PTA prices will fall again, and the operating conditions of enterprises will deteriorate, so production restrictions and price guarantees will be restarted.
Due to the sharp increase in PTA prices, the operations of PTA manufacturers have significantly improved. Therefore, the operating load of PTA manufacturers has rebounded significantly recently. As of March 22, it was 73.8%, while it only remained at 60%-65% from January to February. %. Therefore, we have reason to believe that as supply continues to increase, the price of PTA will be suppressed. In addition, crude oil may weaken in the later period, which will further compress the production cost of PTA.
To sum up, due to the impact of Iran not joining the production freeze agreement and OPEC lowering demand expectations, crude oil prices may weaken in the later period, which will suppress PTA prices. In addition, considering the current high operating load and the expectation of cost decline, under the combined effect of supply pressure and cost collapse, there is a greater probability that PTA prices will weaken in the later period.