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Rising oil prices, cotton shortages and increased demand are driving unusual price increases in polyester.
By Lynn Keillor
For years, the primary indicator of polyester fiber or filament cost was the fluctuation in petroleum prices. If the price of a barrel of oil increased, so did the price per pound of the base synthetic ingredient: polyester staple fiber (PSF).
“This last eight months has been different,” says Alasdair Carmichael, president of the Americas division of the U.K.-based PCI Fibres. “Oil has been increasing, but the rate of increase at the fiber level has been greater than the increase at the oil level.” A new factor has come into play in the past year, and it’s surprised industry watchers. The price increases this year are demand-driven, Carmichael says, and the additional demand is due, in large part, to a shortage of cotton.
Synthetic fiber prices may seem to have very little connection to the natural fiber raw material market. However, a shortage of cotton has textile makers scrambling to continue production amidst rising raw material prices. In many cases they’re replacing cotton content with polyesters, creating more demand for synthetic fibers. As the demand increases, so do prices for everyone using polyester.
According to Carmichael, there has been a 45 percent price increase in the raw materials that make up polyester (purified terephthalic acid (PTA) and monoethylene glycol (MEG) pricing since March 2010, when the cost was $1,270 per metric ton; in March 2011, the cost was $1,832 per metric ton. In the fabric market, finished 1,000-denier polyester has increased 32 percent in price, he notes.
“We had forecasted raw material and polyester prices would be stable to down in 2010,” Carmichael says. “For nine months, we were exactly right. From January to September, the price of polyester was stable to down. Then everything changed. It was truly originated by the rising cotton prices, and people moving out of cotton where they could and substituting with polyester.”
Cotton picking
Since January 2009, DAK Americas, Charlotte, N.C., has announced 15 price increases, ranging from 3 cents to 9 cents per pound each, on its sale of polyester staple fiber. The increases add up to 47 cents per pound. One increase is attributed to economic recovery, one to raw material prices, one is based on crude prices, another attributed to the earthquake in Japan. Three increases totaling 23 cents—the first noted in October 2010—are attributed directly to the cotton market.
“I would say [the price increases are] unprecedented,” says Jon McNaull, senior business director for fibers at DAK Americas. “The frequency of increases and this trend is not at all typical. This kind of volatility is very unusual. If you go back historically, I don’t think you’d see any pattern similar to this.
“We’re watching this very closely,” McNaull says. “Cotton is such a huge global commodity that it really is a driver of apparel production. We have to figure out how to react to it, because there’s really no way to manage it.”
This year’s cotton season, measured from August to July, started in a tough spot. Economic recovery in China increased demand for cotton, which resulted in a big shortfall, according to Carmichael. Global demand continued to increase in August and September 2010.
At the same time, various natural occurrences resulted in a poor cotton crop in some primary cotton-producing areas in the August 2010–July 2011 growing season, including early-season flooding in Pakistan and ongoing drought in China, the leading producer and consumer of cotton.
According to the U.S. Department of Agriculture’s April 2011 report on World Agricultural Supply and Demand Estimates, the world cotton forecasts for 2010-11 include lower production—reduced by about 400,000 bales—and higher consumption, which will likely result in a 2 percent reduction in ending stocks. Ending stocks, which feed the market from July to late November, will be about 36 percent of world consumption, which is the smallest stocks-to-consumption ratio since the 1993-94 season. Typically, about 50 percent of the global usage is a part of ending stock, Carmichael says.
Fabric demand
As demand for cotton products increases and the availability of the material decreases, cotton users are experimenting with new material formulas that replace at least some of the cotton content with polyester.
Nearly 90 percent of 70 companies surveyed for the Global Retail Manufacturers and Importers survey released on April 13 indicated that they will replace some of the cotton content in their products with rayon or Lycra®. “That has resulted in higher demand for polyester,” Carmichael says, which started a price trend that trickled up and down the chain: the polyester producers saw an opportunity to raise prices; then the raw material producers jumped on board. “That ran over into anyone who was making polyester filament or anything made of polyester.”
The increasing prices have not made significant changes to the way DAK does business. “We view this as a short-term dislocation. In the context of our partnership, we’re working with our customers to try to manage this the best way for both parties,” McNaull says. “We’ve not taken an opportunistic approach to this; we’re staying committed long-term to our relationships here.
“I think for any company, cost increases are a challenge, and that’s been a key challenge for our customers: how can they manage this as they’re managing their business downstream,” McNaull adds.
Other cost culprits
Cotton may be a large price driver, but it’s not the only factor. In many ways, the various price-increasing factors are linked to each other.
Crude oil prices may not be the driving factor at the moment, but neither are they absent from the equation. Oil prices have steadily increased, even as attention has shifted to cotton. Petroleum byproducts are a key ingredient in polyesters, and increased polyester demand means oil prices will continue to affect raw material pricing.
Brian Herington, president of North Carolina-based Performance Fibers, says the cost of raw materials, particularly petroleum-based paraxylene and MEG, is affecting his business. Crude oil, along with cotton, was behind an 8-cent PSF increase at DAK in February.
“Oil is a basic input to this whole value chain, and if it continues to rise, at some point it could create a cost-driver in the chain,” McNaull says. “Ordinarily, if demand was normal and there was a big move in oil, it could be a factor.”
Carmichael also predicts a gap in petrochemical products, due to projects that were put on hold at the start of the recession. These projects can take three to four years to complete, which means the market could start noticing it this year. “We’re in for a tight supply-demand balance at the petrochemical level due to delays at the plants,” he says.
To some extent, natural disasters such as the earthquake in Japan (which closed two of three paraxylene manufacturers) and the tornadoes in the southern U.S. (which caused power outages to plants) will affect pricing, but to a minor degree, Carmichael says.
The disruption in Japan had less of an impact than feared, he adds, especially considering that Japan is the largest exporter of paraxylene. The price spiked significantly in the aftermath of the tsunami, and the PTA producers absorbed the cost, probably to avoid demand destruction, Carmichael says. Paraxylene price levels dropped back to a normal range in about 10 trading days.
Carmichael and McNaull also look at the trend behind the trend: the overall demand from emerging nations and their appetite for commodities. China’s quick economic recovery has been a large factor in pushing prices up.
“It’s never just one thing [that drives prices]; it’s always a whole sequence of things,” Carmichael says. “But the thing that’s separated this round of increases is that it’s primarily demand-driven, and that brings us back to cotton.”