PTA spot basis differentials have seen a significant decline since mid-July. By July 21st, the PTA spot basis had fallen by 62 yuan per ton compared to July 10th, a drop of 26%. The strong reality of PTA destocking is being outweighed by the weaker expectation of increased supply later, with short-term spot basis differentials forecast to continue falling.

Spot Basis Declines Amid Destocking Context

The noticeable fall in PTA spot basis differentials from mid-July reflects insufficient market confidence, even within a context of ongoing inventory drawdowns. Based on current supply and demand dynamics, PTA spot inventories are estimated to have decreased by approximately 900,000 tons in July, likely bringing social inventories to a low point within a 36-month period. However, the spot market is not tight. Major PTA suppliers have been active sellers, and numerous trader offers are available, indicating a market that is destocking but not experiencing a shortage. Even typhoon weather failed to provide any market uplift.

Outlook: Restarting Plants Weigh on Basis

Expectations for an increase in PTA plant restarts, leading to gradually rising production, combined with a relatively cautious demand outlook, point to a significant slowdown in destocking speed. This is forecast to pressure spot basis differentials lower.

While PTA spot inventories are projected to continue declining in August, the pace of destocking is expected to diminish. Based on current maintenance schedules and PX supply, PTA monthly output in August is estimated at around 5.94 million tons. Some plants have no clear restart plans. Assuming a full month of shutdowns for a 3.2 million-ton plant in East China and a 1 million-ton plant in Southwest China, and restarts around August 15th for a 2.2 million-ton plant and a 1.5 million-ton plant in East China, along with a 1.1 million-ton plant in South China. Additionally, a 4.5 million-ton plant in South China, originally slated for an early August restart, has not yet confirmed if it will proceed as planned.

Scenario 1: Assuming the average monthly operating rate for downstream polyester rises to 80% in August, with estimated monthly polyester output of 6.72 million tons, and adding demand from non-polyester sectors, PTA destocking in August is projected at around 360,000 tons.

Scenario 2: Assuming the average monthly operating rate for downstream polyester rises to 83% in August, with estimated monthly polyester output of 6.97 million tons, PTA destocking in August is projected at around 570,000 tons.

From the perspective of the terminal textile market, hotter weather marks the traditional demand off-season for the textile industry. Loom operating rates are unlikely to see significant improvement. Coupled with geopolitical uncertainties, textile enterprises face challenges in passing cost pressures downstream. Maintaining low inventories and high turnover will likely result in only limited increases in polyester operating rates in August. Weak demand will slow the pace of PTA spot destocking, with the average polyester operating rate more likely to recover to around 80% in August. Consequently, the scale of PTA spot destocking in August is expected to be significantly lower than in July. Mid-August PTA offers are referenced at a premium of approximately 135-145 yuan per ton over the TA2609 futures contract, a decline from July's spot basis, indirectly reflecting expectations for a slowdown in future PTA destocking.

Conclusion

In summary, with more PTA capacity restarting from late July into August, the destocking pace is forecast to slow, negatively impacting market sentiment. PTA spot basis differentials are highly likely to fall, with the August average potentially declining to a premium of 100-130 yuan per ton over the TA2609 futures contract. This is expected to dampen the enthusiasm of spot traders and lead to poor spot trading activity.