What s s the Problem with PTA/MEG? Zhu Boliang, Chief Editor, China Chemical Fiber Economic Information Network

What s s the Problem with PTA/MEG? Zhu Boliang, Chief Editor, China Chemical Fiber Economic Information Network

Outline I. Review of Recent Market Trend II. Fundamentals of Polyester Raw Material Market III. Market Situation and Outlook in H2, 2005

I. Review of Recent Market Trend

PX, PTA & MEG Price Trend in Past Two Years USD/ton 1300 1200 1100 1000 900 800 700 600 500 400 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 PTA(CFR SE Asia) PX(Korea FOB) MEG(C&F SE Asia)

The polyester raw material market experienced a round of forceful uptrend from May 2005, the SARS spread period, to November 2004. From November 2004, the prices of polyester raw materials started to go down. After rebounding a little in February and March 2005, the prices continued to plunge in larger ranges.

Background of Polyester Raw Material Market in Past Two Years PET capacities in Asia, particularly in China mainland expanded sharply in recent years, and demand for raw materials grew rapidly as well, leading to a relatively tight supplies of PTA and MEG. Crude oil price hiked continuously. WTI price moved up from US$25/bbl in May 2005 to US$49/bbl at present. In early stage, the price once hit a new high of US$57/bbl. Devaluation of USD. USD index declined from 99 points in May 2003 to current 86 points. In early stage, the index once arrived at a low position of 80 points.

II. Changes on the Fundamentals of Polyester Raw Material Market The market trend curve shows that the bullish polyester raw material market has come to an end in November 2004 after more than one year of operation. The market operations after March 2005 confirmed that one-stage bullish trend for polyester raw materials market has ceased. And the situations in past two months even predict that this market will probably enter into a bearish trend.

Reasons for the Closure of One-stage Bullish Polyester Raw Material Market 1. Restriction on China s textile export 2. Startup of new raw material units 3. USD exchange rate hiked after hitting a bottom line 4. Crude oil price fell after reaching a ceiling Basic reason: Supplies of polyester raw materials were originally as tight as what we had imaged.

Historical Growth Rates of Capacities of Polyester Raw Materials 1990-2005 PX 8.1% PTA 10.3% MEG 5.6% PET 9.5% PET output 8.8% 1995-2005 9.4% 10.5% 5.8% 9.8% 10.0% 2000-2005 6.3% 7.0% 4.4% 8.1% 6.5% 2002-2005 7.6% 9.4% 3.8% 7.5% 7.9%

Growth rate of PTA capacity was higher than that of PET output in past years. So PTA supply should have got more and more sufficient in the light of PET production. Growth rate of MEG capacity was notably lower than that of PET output, and MEG supplies became tighter and tighter before 2005.

Reasons for the Tightening of PTA Supplies Ideas about the evaluation of PTA supply and demand did not change in time. So players make a large error in judging the balance. The mid-to-long term bullish trend for PTA market caused some additional activities with PTA as a tool, such as speculation and financing activities, which resulted in some extra demand. Thus the apparent market demand saw some nominal expansion.

Reasons for the Tightening of MEG Supplies In fact, MEG supplies were originally much tighter than PTA supplies. In line with the same reason resulting in tight PTA supplies, the originally tight MEG supplies got even tighter, and the originally fragile supply and demand relation became more fragile. So the price rocketed for some time and then plunged for some other time naturally.

Confirmation for Termination of One-stage Bullish Market Trend The further expansion on PTA and MEG capacities, particularly on MEG capacity, led to a rapid growth on market supplies. The original additional demand shrank significantly due to the changes on market sentiment. Players expectation for the cost-push influence reduced considerably after seeing the market operations in H1, 2005. Tight funds supply, restricted textile export, raised tariff rates and potential appreciation on RMB value.

III. Market Outlook in H2, 2005 1. Growth on PET output 2. PTA and PX supplies 3. MEG supplies 4. Main factors affecting polyester raw material market trend 5. Polyester raw material market tendency in H2, 2005

Growth on PET Output As PET has been oversupplied, the influence of capacity expansion upon output increase has weakened a lot. It may be more proper to estimate the PET output in 2005 based on the growth rule of statistics. The annual growth rate of global PET output in past five years was 6.5% on average, and the average rate in the past three years was 7.9%. It s estimated the global PET output in 2005 will grow by 7.5% year on year, and the demand for PTA and EG will increase in the same speed.

Growth on PTA Capacities Country Company Scale Startup date India Indian Oil Corp 53 July, 2005 Thailand Mitsui Petrochemical (Thailand) 50 Q4, 2005 China Invista (Far East) 60 Q1, 2006 China Liaoyang Petrochemical 53 Q1, 2006 Thailand Indorama 70 Q1, 2006 Iran Shahid Tondgooyan 35 Q1, 2006 India Reliance 70 Q2, 2006

PTA Supply and Demand Global PTA output in end 2004 was 32,000kt/yr Two expansion projects of three units came onstream in Jan.-May 2005, and the added capacities totaled 1,620kt/yr. Two new units with combined capacity of 1,030kt/yr will be commissioned in H2, 2005. The global PTA capacity will grow by 2,650kt/yr or 8.28% in 2005, which is larger than the growth of PET output. The global PTA capacity will expand by 3,910kt/yr or 11.6% in July 2005-June 2006.

PX Capacity Expansion Iran Buali Sina Petrochemical 35 March, 2005 Malaysia Aromatics Malaysia Sdn Bhd 18 May, 2005 South Korea Samsung-Atofina 10 June, 2005 India India Oil 35 Q4, 2005 China Liaoyang Petrochemical 45 December Iran Borzouyeh Petrochemical 75 Early 2006 Indonesia Tuban Petrochemical 50 Early 2006

PX Capacity Will Not Become a Bottleneck for PTA Output Growth The global PX capacity amounted to 25,000kt/yr in end 2004. Of them, 1,160kt/yr were brought onstream in 2004. In 2005, the global PX capacity will increase by 1,700kt or 7%. The global PX supplies were not very tight in recent years. And the growth rate of PX capacity in 2005 is equal to that of PX demand.

EX Capacity Expansion Saudi Arab SABIC 60 End 2004 China BASF-YPC 34 May 2005 India Reliance 8 End May 2005 (Restart) China CNOOC-Shell 32 Q1, 2006 Iran Marun Petrochemical 40 Q2, 2006

MEG Supply and Demand The global MEG capacity amounted to 16,400kt/yr in end 2004, of which, ¾ were used in the polyester industry, at 12,300kt. Two new units and several expansion projects will come onstream in 2005, and the MEG capacity will grow by 1,260kt/yr, rising by more than 10%.

Main Factors Affecting Market Trend in the Future The export situation of Chinese textiles is the key factor affecting the PTA and MEG price trend in H2, 2005. China s policies on textile export, including the contents and the issuance frequency as well as textile exportrelated diplomatic activities will all have great influence on China s textile export.

Influence of Production Cost on MEG Price Trend Cannot Be Neglected PTA and MEG are both polyester raw materials, and they are faced with the same market demand. On cost sector, the PTA and PX prices show a two-way reaction, while the MEG and ethylene prices show an one-way reaction. Under this circumstance, the strength of MEG and PTA prices will be different in some time, and the comparison can change at any time.

Curve for Gross Interest of MEG Processing USD/ton 1600 1400 1200 1000 800 600 400 200 0 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Ethylene(ROK FOB) EG(C&F SEA) Gross interest Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 Note: Gross interest of MEG processing=meg price-ethylene price *0.58

Prospect of PTA and MEG price trend in H2, 2005 The polyester raw material market needs a calm adjustment after experiencing a sharp price rise and drop. The high crude oil price prevents the bottom line from returning to the same position as that of three years ago. PTA supply and demand situation will change little, and the price will continue to run along a relatively stable trend. The MEG sentiment in 2005 will be a little weaker than in 2004, but the supply and demand tend to get a balance, and the cost influence will become more outstanding.

Thank you Zhu Boliang, CCFEI 2 nd June 2005