Inside China's Polyester Fiber Industry: Why the Capacity Overhang?

        Polyester can be broken down into two constituent parts – polyester filament yarn (PFY) and polyester staple fiber (PSF).    In 2008, China produced 9.11 million tons of polyester yarn and fiber.  From 2001-2008, China’s polyester output expanded at an annual rate of 18.8% buoyed by its thriving textile and apparel sector.  Over the same period, China’s consumption for textile raw materials, specifically polyester fiber, increased at an annual rate of 10%.  China’s polyester output and use accounted for over 50% of global production and consumption in 2008.  Capacity expansions in China have historically been greater than overall consumption generated in the domestic and international markets so that excess capacity was built into the polyester industry.

        The large capacity additions in China coincided with high crude oil prices.  Because polyester is a derivative of petroleum product, crude oil prices directly affect polyester price.  From 2001 until the third quarter of 2008, sustained increases in the price of crude oil and petrochemicals resulted in higher raw materials costs, notably monoethylene glycol (MEG) and purified terephthalic acid (PTA), which account for over 80% of the cost of polyester production.  Despite the increase in raw materials costs, excess capacity led to fierce competition and tempered the rise in polyester prices, shrinking producers’ profit margins (Walker, 2008).  Notwithstanding lower profits and numerous plant closures, China’s output of polyester fiber continued to grow, although at a slower pace.  On the other hand, China’s counterpart producers in South Korea and Taiwan have reduced their polyester output in recent years. 

        The objective of this paper is to characterize the production structure of China’s polyester fiber industry and in so doing explain the industry’s resilience to rising petrochemical prices, excess capacities, and diminishing profits in recent years.