Analysis, Forecast and Suggestions on China Polyester Industry

Analysis, Forecast and Suggestions on China Polyester Industry Zheng Junlin, Secretary General, China Chemical Fiber Association () 29 October, 2009 Analysis, Forecast and Suggestions on China Polyester Industry Ⅰ. Summary on polyester industry in Q1-Q3, 2009 Ⅱ. Reason for quick development of polyester industry and the hidden troubles Ⅲ. Factors to influence development of polyester industry Ⅳ. Development trend of polyester industry and the suggestions 1

Ⅰ. Summary on polyester industry in Q1-Q3, 2009 1. Current situation and status of China chemical fiber industry 2. Features of quick development of chemical fiber industry 3. Summary on polyester industry in Q1-Q3, 2009 1 Current situation and status of China chemical fiber industry Table 1: Capacity and prod. of China CF industry 2008 Capacity (kt/yr) Production (kt) Percentage of the world Chemical fiber 27,120 24,050 57 % PFY 15,158 12,829 70.2 % PSF 6,930 7,216 59.8 % 2

Table 2: Percent of CF in textile feedstock in China 2008 2008 Chemical fiber production Chemical fiber imports Chemical fiber exports Total amount of processed chemical fibers Amount of chemical fiber for textile use Percent of chemical fiber in textile feedstock 24,046.1 816.8 1,707.8 23,155.1 22,355.1 around 63 % Table 3: Export of CF-based textiles and apparel 2008 Whole textile industry (billion $) CF-based (billion $) Percent of CF Textiles 69.834 32.769 46.92% Apparel 119.79 39.854 33.27% Total 189.624 72.623 38.30% 3

2 Features of quick development of chemical fiber industry Table 4: Capacity of each sector in CF industry 2008 Total Viscose Polyester Nylon Acrylic Vinylon Spandex Polypropylene Capacity 2008(kt/yr) 27,120 1,691.2 22,088.2 1,410.1 945 95.7 312 584.1 Percent 6.24% 81.45% 5.20% 3.48% 0.35% 1.15% 2.15% Table 5: CF capacity distribution in China 2008 Number of producers Percent Capacity (kt/yr) Percent Eastern 661 84.31% 24,250.5 89.42% Central 88 11.22% 2,084.7 7.69% Western 35 4.46% 784.8 2.89% Total 784 100% 27,120 100% 4

Table 6: CF capacities in China by province 2008 Province Capacity (kt/yr) Percent of national total 1 Zhejiang 10,094.4 37.22% 2 Jiangsu 7,755.9 28.60% 3 Fujian 2,232.1 8.23% 4 Shandong 1,134.6 4.18% 5 Shanghai 1,049 3.87% Total 22,266 82.1% Table 7: Asset structure of CF industry in 2008 (based on capacity) State-owned and state-holding enterprises Private enterprises Foreign-funded enterprises 1999 61.6% 28.7% 9.7% 2008 22.5% 68.6% 8.9% 5

Table 8: Scale Structure of CF producers 2008 (according to capacity) Scale (kt/yr) Number of producers Capacity (kt/yr) % of total capacity At & above 200 30 13,236 48.81% 100-200 (inclu. 100) 40 5,571.7 20.54% 50-100 (inclu. 50) 46 2,921.5 10.77% Total 116 21,729.2 80.12% Table 9: CF production and increase rate 2000-2008 2000 2001 2002 2003 2004 2005 2006 2007 2008 Ave. up rate 2000~2008 Production (kt) 6,954.1 8,414.8 9,907.4 11,811 14,255 16,648 20,732 24,139 24,047 Increase rate 15.51% 21.00% 17.74% 19.22% 20.69% 16.79% 24.53% 16.44% -0.38% 13.21% 6

Chart 1: CF total production value growth rate 1976-2008 100% 80% 60% 40% 20% 0% -20% -40% 1977 1980 1979 1976 1981 1991 1987 1985 1983 1986 1990 1984 1993 1995 1999 1998 2002 2001 2005 2004 2007 2006 2008 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 3. Summary of Polyester Industry in Q1-Q3, 2009 Performance of Polyester Industry in Jan-Aug 2009 Sentiment in Jan-Sep 2009 Summary and Forecast on Chemical Fiber in 2009 7

Performance of Polyester Industry in Jan-Aug 2009 Table 10: Production of chemical fiber Jan-Aug, 2009 (Unit: kt) Variety Chemical fiber total Viscose fiber Synthetic fiber Polyester PFY PSF Nylon Acrylic Vinylon Polypropylene Production Jan-Aug 2009 17,585.7 1,036.5 15,910.6 14,046.9 9,018.1 5,028.8 855.8 466.9 36.3 154.8 Production Jan-Aug 2008 15,520 889.5 13,966.5 12,289.5 7,865.3 4,424.2 756.4 387.1 35.7 167.4 Y-o-Y Change (%) 13.31 16.53 13.92 14.30 14.66 13.67 13.14 20.61 1.56-7.58 Table 11: CF Import Volume Jan-Aug, 2009 (Unit: kt) Import volume Jan-Aug 2009 Import volume Jan-Aug 2008 Y-o-Y Change (%) Chemical fiber total 573.3 590.5-2.92 PSF 100.4 99.4 1.02 PFY 106.5 122.3-12.92 Acrylic fiber 127.1 118.9 6.91 Nylon filament 126.6 132.4-4.34 Spandex 10.9 10.1 8.46 VSF 55.4 42.8 29.59 8

Table 12. CF Export Volume Jan-Aug, 2009 (kt) Export volume (ton) Export value (million $) Jan-Aug One Year Earlier Y-o-Y % Jan-Aug One Year Earlier Y-o-Y % Total 922267.0 1206882.0-23.58% 1770.119 273404.9-35.26% PSF 248393.1 321536.7-22.75% 250.995 41089.0-38.91% PFY 402702.4 562647.1-28.43% 578.357 103403.5-44.07% Acrylic fiber 3222.3 9090.6-64.55% 6.923 22.335-69.00% Nylon filament 57181.6 63820.9-10.40% 179.676 243.307-26.15% Spandex 16260.7 21831.0-25.52% 104.338 179.052-41.73% VFY 48470.1 43499.3 11.43% 200.936 205.46-2.20% VSF 57361.4 63603.0-9.82% 115.129 163.173-29.44% Table 13: Profit of Chemical Fiber Industry Jan-Aug Chemical fiber Total profit (billion yuan) Jan-Aug 6.918 One year earlier 4.857 Change (%) 42.42% Loss for enterprises (bil yuan) Jan-Aug 2.407 One year earlier 3.627 Change (%) -33.65% Man-made fiber 2.898 0.941 207.96% 0.208 0.884-76.45% Polyester fiber 2.883 2.179 32.28% 1.103 1.507-26.77% Table 14: Profit of Chemical Fiber Industry Jan-May Chemical fiber Man-made fiber Polyester fiber Total profits (billion yuan) Jan-May 2.54 1.413 1.138 One year earlier 3.889 1.003 1.445 Change (%) -34.69% 40.88% -21.25% Loss for enterprises (bil yuan) Jan-May 2.331 0.271 0.958 One year earlier 1.76 0.405 0.811 Change (%) 32.46% -33.02% 18.25% 9

Table 15: Profit of Chemical Fiber Industry Jan-Feb Chemical fiber Man-made fiber Polyester fiber Total profit (billion yuan) Jan-Feb -0.127 0.133 0.065 One year earlier 1.203 0.465 0.275 Change (%) -110.54% -71.47% -76.37% Loss for enterprises (bil yuan) Jan- Feb 1.538 0.398 0.475 One year earlier 0.806 0.125 0.476 Change (%) 90.81% 219.18% -0.25% Table 16: Completed Investment on CF Industry Jan-Aug 2009 Chemical fiber Viscose fiber and feedstock Pulp Viscose fiber Synthetic fiber Nylon Polyester fiber Acrylic fiber Vinylon Other synthetic fiber Jan-Aug (billion yuan) 15.736 5.325 1.55 3.776 10.41 1.27 3.695 0.166 0.791 4.489 Year-on-year (%) -17.91-3.19-19.41 5.53-23.84-29.43-33.15 440.42-13.98-16.75 10

Sentiment in Jan-Sep 2009 Chart 2: PFY, PSF and crude prices Jan 2004 - Sep 2009 1.4D directed spun PSF FDY100D/72F semi-dull in Xiaoshan and Shaoxing WTI spot prices $/T Crude oil surged from $33 to $75/bbl in Jan-Jun 2009, but the same markup was achieved in 28 months from 2004 to Apr 2006. Meanwhile polyester lost 20-20% (PFY 2,700 yuan and PSF 2,400 yuan) This indicated except feedstock costs, operation costs dropped benefited from scale economy brought by technique upgrading and structure adjustment. Chart 3 : Price trend of PX, PTA and MEG Jan 2008 - Sep 2009 MEG, RMB PTA, RMB PX, FOB Korea $/T 11

Chart 4: Price trend of PFY products, 1 Jan 2008 to 30 Sep 2009 DTY100D/48F SD in Xiaoshan and Shaoxing FDY100D/72F SD in Xiaoshan and Shaoxing POY150D/48F SD in Xiaoshan and Shaoxing Chart 5: Cost and profit of POY 2008-2009 POY costs and the profit Profit Costs POY price Yuan/ton POY costs and the profit 25 days earlier for feedstock Profit Costs POY price Yuan/ton 12

Chart 6: Price trend of domestic PTA and PSF, Jan 2008 - Sep 2009 Yuan/ton Home-made PTA 1.4Dx38mm direct-melt-spun PSF PSF Chart 7: Price Comparison of PSF, Jan-Sep in 2007-2009 Yuan/ton 30Dec 13Jan 27Jan 10Feb 24Feb 10Mar 24Mar 7Apr 21Apr 5May 19May 2Jun 16Jun 30Jun 14Jul 28Jul 11Aug 25Aug 8Sep 22Sep 13

Chart 8: Cost & Profit of PSF, Dec 2007 - Sep 2009 PSF costs and profit Profit Costs PSF price Yuan/ton PSF costs and profit 25 days earlier for feedstock Profit Costs PSF price Chart 9: Comparison of VSF, PSF and Cotton 2008-2009 Price comparison of PSF, VSF and 329 cotton from 2008-2009 1.4Dx38mm PSF 1.5Dx38mm VSF 329 cotton Yuan/ton 14

Forecast on 2009 chemical fiber target CF production Polyester fiber CF import volume CF export volume Profit(Jan-Nov) Polyester fiber Operation quality Optimistic estimation 26800kt(12%) 21860kt(12.2%) 800kt(-2%) 1550kt(-10%) 9 bil yuan(125%) 4.5 bil yuan(67%) Largely improved Conservative estimation 26000kt(8%) 21200kt(8.2%) 730kt(-10%) 1350kt(-20%) 6 bil yuan(76%) 2.6 bil yuan(-4%) Evidently improved (): year-on-year change Ⅱ. Reason for Quick Development of Polyester Industry and the Hidden Troubles 1 Reason for quick development Drive of demand Drive of mechanism adjustment Drive of localization technology 2 Hidden troubles of the industry 15

1. Reason for quick development Chart 10: GDP growth rate of China, textile and CF industry 2001-2007 40.00% 30.00% 20.00% 10.00% 0.00% -10.00% -20.00% -30.00% 2001 2002 2003 2004 2005 2006 2007 Domestic GDP growth rate Textiles industry GDP growth rate Chemical fiber industry GDP growth rate Chart 11: Textile industry GDP 1978-2008 35000 30000 Textiles industry GDP (100 million) 25000 20000 15000 10000 5000 0 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Chart 12: Chemical fiber industry GDP 1978-2008 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 Chemical fiber industry GDP (100 million) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 16

Table 17: Production of nine CF derivatives industries 2008 Derivatives Unit Production 2008 Y-O-Y Change Blended yarn kt 2525.1-0.59% Chemical fiber yarn kt 1590.5-2.17% Blended fabric bil meter 8.123 1.56% Chemical fiber fabric bil meter 15.911 6.87% Cord fabric kt 489 8.59% Nonwoven fabric kt 765.1 21.25% Hand knitting yarn kt 304.2 0.01% Stuff goods bil meter 0.695 5.76% Yarn-made fabric bil meter 12.75-4.10% Chart 13: Growth rate of CF import & export 2000-2008 Growth rate % 120.00% 100.00% 80.00% Import growth rate Export growth rate 60.00% 40.00% 20.00% 0.00% -20.00% -40.00% 2001 2002 2003 2004 2005 2006 2007 2008 year 17

Table 18: Asset structure in chemical fiber industry (according to capacity) State-owned and state-holding enterprises Private enterprises Foreign-funded enterprises 1999 61.6% 28.7% 9.7% 2008 22.5% 68.6% 8.9% Table 19: Polyester technology improvement during "the 10th five-years and "the 8th-9th five-years" New capacity scale Total investment Unit investment Construction cycle Operation costs Technology source, process feature and level "the 8 th -9 th five-years" 60kt 0.4~0.9 billion yuan 7,400-15,000 yuan/ton 24~36 months 7,200 yuan/ton Imported facilities, indirect-spinning process, high investment, conventional fibers, dpf>1 "the 10th five-years" 150~200kt 0.18~0.23 billion yuan 1,000-1,500 yuan/ton 14 months 5,600~6,000 yuan/ton Large-scale home-made facilities, mainly directspinning process, low investment, micro fibers, dpf 0.3~0.5 18

Table 20: PFY technology improvement during "the 10th five-years and "the 8th-9th five-years" New capacity scale Total investment Unit investment Construction cycle Operation costs Technology source, process feature and level 5~20kt 0.3~1.3 billion yuan 60,000~65,000 yuan/ton 24~36 months High unit costs Imported facilities, low capacity per unit, poor process control, semi-automatic winding. and mainly UDY and DTY "the 10th five-years" 60~200kt 9~30 billion yuan 1,500 yuan/ton 12 months Direct-spinning costs lower by around 2,000 yuan/ton Large scale, home-made facilities, high-level automatic control, multi-bobbin winding, and mainly produces POY and FDY Table 21: PSF technology improvement during "the 10th five-years and "the 8th-9th five-years" New capacity scale "the 8 th -9 th fiveyears" "the 8 th -9 th fiveyears" 50~100 tons/day "the 10th five-years" 150~200 ton/day Total investment Unit investment Construction cycle Operation costs Technology source, process feature and level 0.12~0.2 billion yuan 6,000~8,000 yuan/ton 2~3 years 2,000~3,000 yuan/ton Mostly home-made facilities, low capacity per line, low efficiency, and low technical levels 0.15~0.18 billion yuan 3,000~3,500 yuan 16~18 months 600~900 yuan/ton Imported Neumag facilities, single line scale and the overall technical level have reached world advanced level 19

2. Hidden troubles of the industry 1) Two acute conflicts 1 Conflict between demand and supply 2 Conflict between demand and supply of resources 2) Two major problems 1 Market 2 Evident disadvantages of industry structure Chart 14: Dependence on import of feedstock 2000-2008 100% 80% 60% 40% 20% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 PTA 52.93% 58.95% 63.93% 53.49% 56.36% 53.24% 50.98% 42.70% 39.20% EG 53.60% 62.50% 70.90% 73.10% 77.70% 78.00% 72.00% 72.90% 74.90% CPL 68.12% 65.55% 65.36% 66.39% 70.19% 60.48% 60.96% 61.30% AN 35.80% 38.30% 38.50% 31.10% 27.40% 24.70% 29.00% 23.60% 20

Two major problems 1 Market----- Competition order 2 Evident disadvantages of industry structure 1)Hasn t formed international-scaled big groups 2)Lack of capability of independent innovation 3)Singleness of enterprise ownership Ⅲ. Factors to influence development of polyester industry Crude price trend PTA/MEG price trend Export growth of chemical fiber, textiles and apparel international economic situation Growth of domestic demand domestic economic situation Domestic cotton price trend VSF and PSF Fundamentals change of domestic chemical fiber chain Technology progress and structure adjustment in China 21

Crude price trend PTA/MEG price trend Chart 15: Crude futures Jan 2008 to Oct 2009 Unit: $/bbl WTI prices from 2007 to 2009 Global economy warmed up on stimulus from each country. Export growth of textiles and apparel international economic situation Chart 17: Global GDP growth rate Economic growth rates of major advanced economies in Q2 was higher than expected and positive US GDP m-on-m Euro area GDP m-on-m Japan GDP m-on-m growth is expected in Q3 in some countries and regions. 数据来源 :JP Morgan ISM 22

Growth of domestic demand domestic economic situation Chart 18: China GDP quarter growth rate, 2006-2009 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2006 2007 2008 2009 Chart 19: Growth rate of China PMI Aug 2008-Aug 2009 Purchasing Managers Index from Aug, 2008-Aug, 2009 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 2008 2009 23

Chart 20: Industrial added value Jun 2008-Aug 2009 25.00% 20.00% 15.00% Industrial added value of whole China, textile & chemical fiber industries Whole China Textiles industry Chemical fiber industry 10.00% 5.00% 0.00% -5.00% -10.00% Jun, 2008 Jul Aug Sep Oct Nov Dec Jan- Feb, 2009 Mar Apr May Jun, 2008 Jul Aug -15.00% Chart 21: Export value and trade surplus of textiles, Jan 2008-Aug 2009 100 millionexport value and trade surplus of textiles from 2008-Aug,2009 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Export value Trade surplus Jan, 2008Feb MarApr May JunJul Aug SepOct Nov Dec Jan, 2009Feb MarApr May JunJul Aug 100 million 250 200 150 100 50 0 Export value and trade surplus of textiles from 2008-Aug, 2009 Export value Trade surplus Jan, 2008 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan, 2009 Feb Mar Apr May Jun Jul Aug 24

Drive of downstream demand Textile City of China Chart 22: Sales volume of chemical fiber fabrics,2008-jun 2009 0000 meters 2008 2009 Cotton price trend VSF and PSF Chart 23: China CC Index and Cotlook, 1 Sep 2008-9 Oct 2009 Yuan/ton China CC Index and Cotlook, 1Sep 2008-9 Oct 2009 1Sep 17Sep 3Oct 19Oct 4Nov 20Nov 6Dec 22Dec 7Jan 23Jan 8Feb 24Feb 12Mar 28Mar 13Apr 29Apr 15May 31May 16Jun 2Jul 18Jul 3Aug 19Aug 4Sep 20Sep 6Dec CC Index Cotlook A (1% Customs duty) Cotlook A (sliding duty) Cotlook A index refers to lifting prices in China port (including Customs duty and port charges); China CC index refers to FD-based price. 25

Chart 24: Price Comparison of 329 Cotton, Jan-Sep in 2007-2009 Price comparison of 329 cotton in 2007, 2008 and 2009 Yuan/ton Chart 25: Price of PSF and cotton, Sep 2008-Sep 2009 Yuan/ton Price comparison of domestic PSF, costs and 329 cotton 1Sep 11Sep 21Sep 1Oct 11Oct 21Oct 31Oct 10Nov 20Nov 30Nov 10Dec 20Dec 30Dec 9Jan 19Jan 20Jan 8Feb 18Feb 28Feb 10Mar 20Mar 30Mar 9Apr 19Apr 29Apr 9May 19May 29May 8Jun 18Jun 28Jun 8Jul 18Jul 28Jul 7Aug 17Aug 27Aug 6Sep 16Sep 26Sep Ave. price for 329 cotton 1.4Dx38mm delivered price in Jiangsu, Zhejiang and Shanghai Cash flow costs for PSF 26

Table 22: Fixed asserts investment in CF industry Jan-Aug 2009 Unit: 10000 yuan Total Textiles Chemical fiber Viscose feedstock Pulp Man-made fiber Synthetic fiber Nylon fiber Polyester fiber Acrylic fiber Vinylon Others (1) 18824547 10572915 1573577 532536 154952 377584 1041041 126986 369496 16553 79118 448888 (2) 8270 4595 365 113 30 83 252 37 85 8 38 84 5194 2960 195 77 19 58 118 21 36 8 13 40 2853 1592 98 33 6 27 65 9 24 2 0 30 (1) Y-on-Y 6.55 6.51-17.91-3.19-19.41 5.53-23.84-29.43-33.15 440.42-13.98-16.75 (2) Y-on-Y 5.00 5.19 29.89 0.00 45.61-3.08-13.95-7.61 60.00 111.11-17.65 (1): Completed investment (2): Under construction (3): New construction item (4): Number of completed project (3) (4) 8.18 (3) Y-on-Y 23.34 19.89 10.80 45.28-9.52 81.25-4.07 0.00 5.88 300.00 18.18-27.27 (4) Y-on-Y 72.80 60.81 50.77 32.00-40.00 80.00 62.50 0.00 242.86 100.00 36.36 Ⅳ. Development trend of polyester industry and the suggestions Adjust development mode, to promote & strengthen connotation Quicken technology innovation, and increase R&D & core competitiveness Fiercer market competition, and intensifying international trade frictions Quicken M&A and recombination, and increase industries centralization. Optimize industry structure and quicken development of CF feedstocks. Adjust regional structure, mainly moving to central and western areas. Management modernization and systems innovation, esp. informatization Start to move business to overseas markets, mainly solving problems of feedstocks and the market. 27

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