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Polyethylene Terephthalate (PET)

Polyethylene terephthalate (PET) is the most common member of the polyester family. It is used in bottle resin, film and fibers. Bottle resin accounts for about one-quarter of all polyester melt demand globally, with fiber (staple fiber and filament) applications contributing the bulk of demand (see Exhibit 294).

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Source: CMAI and Bernstein estimates.

Polyester bottle resin is one of the fastest growing plastics and is preferred over glass for its clarity, low cost, shapeability and ease in recycling. Technology improvements now allow for polyester bottles to be used for products that are pasteurized and require hot fill capabilities. Plastic beer bottles are one of the future potential uses. PET is also the most recycled plastic and is familiar through its use in soft drink and water bottles. In many developing areas, access to sanitary drinking water is limited, so light-weight, easily transported, low-cost bottles for safe drinking water add to personal mobility, public hygiene and a better living standard (see Exhibit 295).

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Source: CMAI and Bernstein estimates.

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Polyester bottle resin is easily transported as chips, while polyester fiber is moved as bales of fiber or on bobbins as a filament. Production of polyester resin tends to be located in areas of high consumer consumption such as North America and Western Europe, because transportation of a solid material is costly. PET trade flows are illustrated in Exhibit 296.

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Source: Bernstein analysis.

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PET or polyethylene terephthalate first became of commercial importance as a synthetic fiber, essentially as a replacement for natural silk. It is a condensation polymer, produced from the reaction of ethylene glycol (MEG) and either terephthalic acid (TPA) or its dimethyl ester, dimethyl terephthalate (DMT). Although there are many different polyesters, it is polyethylene terephthalate that became known as fiber-grade polyester and was subsequently used for polyester film and more recently for the manufacture of polyester bottle resin. The polycondensation synthesis of polyesters involves the reaction of ethylene glycol with an organic diacid. The most common diacids utilized are either dimethyl terephthalate (DMT) or terephthalic acid (TPA). These two feedstocks (DMT and TPA) are generally produced via direct reaction between oxygen and paraxylene. Polyester is produced when either DMT or TPA is reacted with ethylene glycol to form melt polymer. The melt polymer is a hot liquid, which can either be processed directly into polyester staple fiber or filament, or further processed through a solidifier. The solidifier produces polyester chip, which is then processed into polyester staple fiber or polyester filament. To produce PET bottle resin, material from the solidifier is sent to a solid stater unit and then processed into PET resin (see Exhibit 297).

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A small portion of polyester used in consumer goods is recycled to form PET chip, which can then be converted to polyester staple fiber, filament or bottle resin. Recycling PET is labor-intensive due to the sorting and classifying involved in collecting and separating polyester goods, such as empty beverage bottles or food containers. Therefore, the recycling of PET is driven by environmental concerns rather than economic justification, since recycled polyester is generally more costly than virgin polyester. The entire PET value chain linking is illustrated in Exhibit 298.

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Ethylene glycol is reacted with either DMT or PTA to produce polyester. The DMT process produces methanol as a byproduct, which is either recycled to the DMT producer for credit or sold. The TPA process has a number of advantages over that starting from DMT and, as a consequence, a great majority of new plants are based on the TPA route. The TPA process consumes less energy and has fewer process steps than that from DMT. It is also lower in raw material consumption. At approximately the same price per kg, the consumption of TPA is about 15% less than that of DMT. No additional chemicals are required to inhibit unwanted chemical reactions, resulting in lower costs. The TPA process also yields only water as a byproduct, while the DMT process yields methanol, which, although it can be sold, needs to be purified. Although the production of melt-phase polymer can be carried out either continuously or as a batch process, the continuous process is far more economical on raw materials, energy and labor costs, and so again is the process of choice. Batch-process technology is, however, available up to 20,000-tons-per-year capacity and does have the advantage of giving the flexibility to produce different types of PET, with minimal losses of intermediate products. When the degree of polymerization has reached the desired level, the resulting polymer may be pumped directly to fiber spinning units, or extruded in rod form and cut into chips. Continuous Polycondensation (TPA Route) The raw materials TPA, MEG and the required catalysts and additives are fed into the slurry preparation vessel where the components are well mixed. The slurry is continuously discharged by the pump into the first esterification reactor that is equipped with a pump stirrer. It is operated above atmospheric pressure and heated by heat transfer medium (HTM) vapor. Approximately 90% of TPA conversion is achieved at this stage. The PET monomer is then fed into the second esterification reactor, which is a staged reactor, equipped with an agitator and again heated by HTM vapor.

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After the introduction of additives, as required for the final product, precondensate is pumped via a pre-polymer filter to the first polycondensation reactor. Polycondensation comprises two reactors both operating under vacuum and heated individually by HTM vapor. In the prepolycondensation reactor, the esterification and polycondensation reactions are allowed to continue until more than 99.5% conversion is achieved with a degree of polycondensation of 20%. The polymer is transferred to a reactor equipped with a disked cage-type agitator of high surface activity. The final viscosity of the polymer is achieved by setting the appropriate temperature and vacuum. Short residence time and moderate product temperature guarantee a high-quality product. The excess MEG is removed by evaporation. Subsequent condensation takes place in the glycol spray condenser systems. The spent MEG is transferred to a recovery unit. PET melt can be pumped to a chips production unit or to a direct spinning plant. Capacities up to 600 tons/day have been installed, with larger capacities potentially available (see Exhibit 299).

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Continuous Polycondensation (DMT Route) The DMT is usually delivered as flakes or pellets in solid form. After melting, it is fed from a supply vessel continuously into the first transesterification stage. MEG, as a mixture of both virgin material and that returned from the rectification column, is added in a prescribed molar ratio to the DMT, and with the help of the catalyst, also added at this point, reacted together at a temperature staggered from 170 to 240 Celsius. The methanol released in the reaction is separated from its accompanying MEG in the rectification column and removed. The MEG is, however, returned to the first transesterification stage. The vapors from the other transestererification stages are similarly separated in the same column.

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PET Film Film-grade PET film can be produced using both discontinuous and continuous processes based on both DMT as well as TPA as raw materials. As with other forms of polyester, DMT was originally the starting material for film, but with modern technology improved quality is obtained using TPA. This is particularly the case for additive systems. The discontinuous process is best suited to capacities below 35 tons per day, while for larger capacities (35-270 tons/day) the continuous process is normally preferred. In each case it is necessary to add additives to the polymer in order to influence and determine the properties of the film. The selection of additives and their preparation and addition are decisive prerequisites for ensuring the quality of the PET film grade. Polyester for Textile Products (Staple Fiber and Filament Yarn) About 70-80% of all textile products are so-called standard products that are manufactured as bulk material. The balance refers to special products, exhibiting diverse properties that are produced at varying rates mainly from chips as the most convenient raw material. In order to be able to obtain standard products at competitive prices, it is imperative to apply the direct spinning process, which means spinning the melt obtained by polycondensation. In most spinning operations, the production process begins with the extruder. Small polyester granules, carefully dried, are transported through to the feed hopper of the spinning extruder. Whether the melt comes from the reactor or from the extruder, in the spinning machine it flows through a uniformly heated manifold to the spin pumps and spinnerets. For the production of staple fibers, direct spinning from the continuous polycondensation process is the most favored route. In the polyester staple fiber process, undrawn fiber tows are first produced. Spinnerets for this process are substantially larger than those used for textile yarns. Each tow is pulled out of the spinneret at the desired speed and deposited into a spinning can. The contents of a number of such cans are then drawn and subsequently subjected to oil-application, crimped, thermo-set and cut to predetermined lengths. Spinning, drawing and cutting can be combined into one continuous process. A large percentage of the yarns for textile applications is taken off the spinnerets without further treatment. The polyester molecules are given a certain orientation parallel to the longitudinal axis of the filaments, although the orientation is not complete. For this reason, these yarns are called pre-orientated or partially oriented yarns POY. Fully drawn yarns (FDY), with preselected residual elongation are achieved by a combined spin-draw process. This can either be done by heating the fiber during the drawing process or via subsequent heating using hot air or steam. This yarn is subsequently wound and the wound filament packaged and transported. PET Resin (Solid State Polycondensation Process) The amorphous polymer produced from the polycondensation process needs to undergo further modification before it is suitable for use in the manufacture of PET bottles. In addition, a co-monomer isophthalic acid is typically added to induce certain properties in the final bottle, such as clarity and barrier properties. This process involves high-temperature treatment of amorphous PET chips in an oxygen- and moisture-free environment in order to modify the properties. The molecular weight is increased, acetaldehyde content is reduced to trace levels, and the PET chips are changed from an amorphous state to a crystal state.

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The lead-time required to build a PET plant is roughly 18-24 months. Capital investment required for a PET plant is in the range of $290 per ton for both TPA and DMT feedstocks, and worldscale size is considered to be 110,000 tons per year. Recently, there have been indications that some producers are considering converting fiber lines to PET service, but to-date this has not occurred to any large extent. PET production economics are broken out in Exhibit 300.

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*OREDO 6XSSO\'HPDQG 2XWORRN On the one hand, polyester is one of the most impressive and dynamic growth areas of any major chemical chain, and on the other, one of the sectors with the poorest profitability and capital return. Advances in technology, which are opening the door for new applications for PET resin and fibers, suggest a specialized product with high product-development cost. Nonetheless, polyester producers continually find themselves faced with customers demanding innovation but unwilling or unable to pay the associated costs. Although the promise of growth seems too great to pass up, reality gives us a picture of a number companies exiting the polyester business. Hoechst, ICI, Shell, Akzo Nobel, and Rhone Poulenc are a few examples of global corporations that exited the polyester sector in the late 1990s. Other producers are struggling to form vertical or horizontal alliances to weather the intense competition within the industry. The historical picture of growth in the polyester industry is indeed impressive. Historical growth for polyester averaged more than 11% per year through most of the 1990s, with only a minor slow down in 1998 as a result of the Asian financial crisis. Polyester capacity in excess of that necessary to keep pace with global demand was added in the 1995-1999 time frame,

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causing a decline in utilization rates and margins. From a derivative product standpoint, most of the overcapacity was focused in polyester staple fiber, followed by polyester filament, with PET resin pulling out of the slump first. Global operating rates began to recover early in 2001, as demand caught up to capacity expansions, with the outlook through 2006 for strong operating rates (see Exhibits 301 and 302).

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Source: CMAI and Bernstein estimates.

The largest portion of polyester polymer demand is still focused around fiber, which represents about two-thirds of the total world polyester demand in 2002. The bulk of this is located in Asia, which has the high population to consume and the low-cost labor center to assemble and export finished apparel and textiles. Although polyester fiber is around 60% of the world demand, and its growth rates have been dynamic, fiber has been losing ground in terms of total market share of polyester polymer to PET bottle resin. World PET bottle resin demand doubled between 1995-2000 and is expected to grow at more than 7% per year over the next 3-5 years. More than 40% of total world demand for PET resin is located in North America. On an absolute volume basis, most of the growth of PET has been concentrated in Western Europe and North America where more than half of the worlds PET capacity and demand is located. PET demand will be supported by emerging opportunities in food packaging and continued substitution for glass and aluminum. Polyester film is the smallest of the three major polyester end-use segments and also currently the slowest-growing. Film capacity is concentrated in three areas of the world: North America, Western Europe, and Northeast Asia. With capacity expansions also heavily concentrated in these regions, it is unlikely any of these regions will slip out of the top three anytime soon. Although digital applications are continuing to replace some of the thick-film applications, film needs, in general, continue to grow at levels near world GDP levels.

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Global PET bottle resin capacity is expected to grow from 9.2 million tons in 2001 to over 13.4 million tons by 2006. Only about one million tons of capacity required to keep pace with forecast demand growth has been publicly announced (Exhibit 303), leaving another three million tons of capacity shortfall by the end of the forecast period.

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Company Nan Ya 1RUWK $PHULFD KoSa :HVWHUQ (XURSH NPC-Iran 0LGGOH (DVW Far Eastern Tianjin PC 1RUWKHDVW $VLD Country United States Germany Iran China China Location Lake City, SC Bad Hersfeld Bandar Imam Shanghai, Shanghai Tianjin, Tianjin Capacity (000 metric tons) 200 200 150 150 352 352 108 90 198 Startup Date 3Q:01 Mid-2002 4Q:03 3Q:01 2001

Source: CMAI and industry sources.

The majority of the capacity additions will be commissioned in North America and Western Europe, resulting in these two regions continuing to contribute more than 50% of global PET bottle resin capacity. Capacity is concentrated in those regions with a developed economy where consumption of nondurable goods such as plastic bottles for soft drinks and water is highest (see Exhibits 304 and 305).

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The PET bottle resin industry differs from nearly all other petrochemical markets in that it retains an industry structure that still contains geographic distinctions. The PET bottle resin markets in North America, South America and Western Europe tend to function in a related manner, mostly because ownership of production capacity is held by only a few firms (see Exhibits 306 and 307). As a result, capacity additions are managed somewhat more prudently and markets are slightly less cyclical and competitive.

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The PET bottle resin industry in Asia, which accounts for about 35% of global capacity, is characterized by a larger number of players and more cyclical and competitive markets. In the lesser-industrialized areas, it is common to find companies that make PET bottle resin also producing the bottles or backward-integrated to refining. This is the opposite of the industry in North America and Western Europe, where there is much more segmentation in the chain. The PET bottle resin market went through a period of depressed profitability in the mid- to late 1990s, resulting in several companies exiting the business all together. Eastman Chemical Company Eastman Chemical owns 16% of global PET bottle resin capacity and is the largest single producer in the world. It has a significantly larger share of global markets than the second- and third-largest producers, with just 9% and 6% of global capacity each. Eastman has been a major player in global

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PET markets for some time but has gradually been losing market share over the last five years. Eastman Chemical was saddled with a considerable amount of debt when it was spun off from Eastman Kodak in the mid1990s. This level of debt made it difficult for Eastman to finance projects fast enough in the rapidly growing bottle resin industry to keep its market share. Eastman has a competitive advantage in that it is one of the few producers with complete back-integration to PTA and DMT capacity in the United States and Western Europe. Eastmans assets are older, particularly in the United States, and the firm tends to focus on specialty grades. As a result of increased competition and declining market share, Eastman has voiced plans to exit the PET bottle resin industry, siting the cyclical nature of the business. However, Eastman has more recently contradicted this with plans to expand (most recent expansions have been via commercial offtake agreements) and it is expected the firm will remain committed to this business based on its strong asset base and market-leader position. Mossi & Ghisolfi Mossi & Ghisolfi (M&G) is a private Italian firm that is one of the few Western European resin producers to be forward-integrated into pre-forms. The firm formerly licensed solid-state technology, but has since sold the technology business to UOP. At least a portion of the proceeds from the sale of this technology were used to purchase Shells assets in North America and Western Europe, to become the third-largest PET bottle resin producer globally. Wellman, Inc. Wellman is a pure polyester player; it produces no other chemicals and does not license technology or have upstream or downstream integration. It was able to leverage its strong position in polyester fibers into the bottle resin industry through aggressive capacity additions over the last five years. Most of its assets are new and are very cost-competitive. It is viewed as a high-quality supplier that is pursuing a growth strategy. Koch Industries/Saba Family Hoechst Celanese sold its North American PET bottle resin assets to Koch Industries and the Saba Family of Mexico, who then formed Kosa. Through Koch, Kosa is the only North American producer with back-integration all the way to the refinery for paraxylene production. This provides a competitive advantage to Kosa because it is able to optimize the complete value chain, particularly during market downturns (we assume through favorable transfer-price agreements). The venture also benefits from other synergies along the production chain and controls around 9% of the global market on a company basis. Exhibit 308 provides a top 25 list of global PET producers.

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Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Company Eastman Chemical Company KoSa Mossi & Ghisolfi Wellman, Inc. Far Eastern Group Formosa Plastics Corporation DAK Sunkyong Industries Dow Chemical Company Shinkong Synthetic Fibers Corp. Kohap Petrochemical Corp. Hualon Corporation Haci Omer Sabanci Holding, A.S. Tongkook Fibers China Petrochemical Corp. Mitsui Chemical Ltd Radici-Aussopol Rhone-Poulenc Tianjin Petrochemicals Brilen, S.A. Bangkok Polyester Company Mitsubishi Kagaku PT Polypet Karyapersada Akzo Nobel AB Yizheng Chemical Fiber Co. Capacity (000 metric tons) 1,428 762 568 450 396 390 307 240 236 190 180 162 157 140 140 130 120 115 110 110 108 95 90 88 87 Share (% of Total) 16.06% 8.57 6.38 5.06 4.45 4.39 3.45 2.70 2.65 2.14 2.02 1.82 1.76 1.57 1.57 1.46 1.35 1.29 1.24 1.24 1.21 1.07 1.01 0.99 0.98

Source: CMAI, corporate reports and Bernstein analysis.

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As with most of the commodity petrochemical and derivative products, PET resin prices are cyclical, with typically a period of seven years between price and margin peaks. Slightly more than half of the 2002 U.S. market is based on purchased TPA, primarily from BP, while the remainder is backward-integrated with paraxylene as a feedstock. There is a somewhat smaller amount of capacity also backward-integrated into MEG. U.S. PET prices have averaged $1,300 per ton over the last 15 years, with margins in the range of $425 per ton. PET prices and margins were depressed through 1999 and 2000 as a result of surplus capacity, coupled with depressed demand as a result of the Asian financial crisis. PET bottle resin prices began to improve in 2001 due to tighter domestic supply/demand and rising relative feedstocks in Asia. Margins should increase substantially into 2003. Later in the forecast, prices are supported by higher feedstock costs, with some margin erosion (see Exhibit 309).

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BERNSTEIN RESEARCH