Can the polyester industry recover from Covid-19’s shockwaves?

With contributions from Peter Martin, Gareth Lamb, Alexei Sinitsa, Chloe Kinner, Joyce Grigorey, Arthur Luo, Andrew Day and Patrick Kirby. 

2019 was a challenging year for polyester, characterised by overcapacity, weakening prices and squeezed margins and complicated by the US-China trade war. 2020 was shaping up to be a better year – before the coronavirus sent a shockwave through the industry, turning consumption upside down and significantly impacting demand.

As many non-essential retailers closed as a result of efforts to curb the pandemic, end-user demand for fibres and textiles – the largest consumer segments of polyester by far – took a sharp knock. While there have been some bright spots, such as the increased demand for personal protective equipment (PPE), the road to recovery is expected to be a long one.

It’s clear that market dynamics have changed after a year of unprecedented challenges, with many producers concerned about their ability to keep their heads above water long enough to see full recovery. Our team of industry experts explored the main issues facing the polyester value chain, from oil prices through to product markets, at our recent European Polyester Conference. In this article, we summarise some of the key discussion points, including:

• How will the pace of economic recovery affect demand for polyester, plastic and packaging?
• Has PET proved recession-proof – and has the impact of the pandemic varied by region?
• How have global lockdown measures affected RPET demand and prices?
• Can fibres demand recover from its hard knock?
• Has overcapacity created a perfect storm for polyester raw materials?

The clouds begin to lift for the global economy, but will it fully bounce back?

Covid-19 has prompted the worst global recession since the Great Depression. As restrictions on movement are lifted, economic activity is rebounding. However, it will take at least until 2022 before we see a global GDP return to 2019 levels.

We expect the pandemic to leave permanent scars on the economy. In 2025, GDP could be as much as 4.5% below our pre-Covid economic outlook – with a significant cumulative loss of US$28 trillion in output.

Policymakers considering the difficult task of how to dig the economy out of a post-pandemic hole may turn to green stimulus measures, which could provide a boost to the energy transition – and potentially add momentum to the materials transition.

So how will the path to economic recovery affect demand for polyester, plastic and packaging? And will the dimmer economic outlook exacerbate the overcapacity problem in the value chain?

PET consumption was resilient to the initial outbreak – but now faces the threat of a true economic recession

The coronavirus crisis put a temporary pause on the war against plastics. Despite the economic shock seen in 2020, PET demand has shown great resilience. The pandemic, and a move to home-based living, has boosted grocery sales and increased demand for PET packaging within some food, beverage and PPE sectors. In comparison to other industries, the PET resin market has largely been shielded from the worst of the fallout.

We’ve adjusted our global forecast for PET demand down from around 3.6% pre-pandemic to flat for this year. However, the impact on regional markets has varied significantly. PET demand in Asia has been hardest hit, while the US market has been the most resilient. 

However, there are still headwinds. The medium-term horizon is severely clouded by complex dynamics as a result of the pandemic. The current rise in case numbers and increased restrictions are a credible threat to the remainder of 2020, and a speedy 2021 recovery. The PET industry now faces the prospect of rising unemployment and lower disposable incomes within key markets.

Having survived the initial meltdown, it will now need to position itself to weather the fallout from potentially prolonged global economic aftershocks.

Has the focus on recycled content shifted during the pandemic?

Covid-19 has impacted collection and downstream demand globally, although the recycling market has shown great resilience.

The industry depends on a steady supply of collected material and bales for its feedstock. Unsurprisingly, collection systems globally were affected by the pandemic, with many kerbside recycling programmes temporarily suspended and informal waste collectors severely reducing activity, decreasing PET bottle collections for a few months. 

Demand for packaging, and therefore for RPET was generally lower, with less tourism activity, travel and a reduced need for on-the-go packaging. In addition, low oil prices resulted in low virgin resin prices putting downward pressure on recycling prices and encouraging substitution back to virgin material in some end use sectors. However, food grade pellet prices have remained relatively robust, leading to unprecedented premiums, with RPET food grade pellet prices reaching nearly double virgin prices in May.

And as many major brands are continuing to pursue voluntary RPET recycled content targets aggressively, collection rates should increase again.

Track the ever-changing RPET industry with our Global Monthly Market Overview.

Fibres segment takes a hard knock

The pandemic has taken its toll on fibre markets. There are signs of improvement as lockdown measures ease, but further waves of the virus could derail any recovery in the second half of this year.

The closure of retail stores and the suspension of home construction and automotive production made a significant dent, with 10.6 million tonnes in consumption expected to be lost across the fibres market this year. As the largest fibres segment, polyester will be hardest hit by lockdown measures, losing five million tonnes.

Although the manufacture of PPE has provided some respite, the impact of the pandemic will be felt in the longer term. Estimated volumes for global fibres won’t recover to our pre-Covid forecast of 143 million tonnes for 2030.

Overcapacity creates the perfect storm for polyester raw materials

A decline in polyester production will have a knock-on effect on global demand for key raw materials, paraxylene (PX) and purified terephthalic acid (PTA), in the coming years.

Demand growth for PX has been cut by 2.5Mt from our pre-pandemic view. We expect a rebound next year, but some demand will be simply lost forever.

Meanwhile, both markets were already grappling with overcapacity. Mega-projects are continuing to go ahead – in China, 24 Mtpa of PTA is set to come onstream between now and 2023, and the pandemic has not deterred this planned expansion. And while some PX and PTA capacities will be rationalised in the coming years, that will do little to curb oversupply.

Those dynamics will mean that understanding and controlling costs will be essential. And it will contribute to a much longer road to recovery for PX and PTA. Will producers be able to keep their heads above water?

Growth continues to be driven by China in other parts of the value chain

The ethylene market has long been characterised by overcapacity. And China is the primary driver of that growth: it will dominate investments over the next five to seven years, accounting for approximately half of global build.

Similarly, China will add vast capacities of mono-ethylene glycol (MEG) production capacity between now and 2026. Combined with other large US production investments this will continue to create an overwhelming excess, putting pressure on prices and margins most likely for the whole decade. And there is little sign that the pandemic will defer these investments or indeed encourage any mass event closures.

For the path ahead to be paved with success, low costs of production will be vital. It would also be beneficial if MEG outputs could be complemented by a range of other ethylene oxide (EO) derivatives at better margins. Even before coronavirus hit the market, the ethylene industry was on course for an extended and pronounced supply-driven downturn, with the bottom of the cycle expected during the middle of this decade. The uncertainty caused by the pandemic could exacerbate the overcapacity situation if demand growth underperforms our base case outlook.