PTFE Prices – taking a step back to leap forward?

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So we’re back to pricing – because until they fully stabilize, we need to be on our guard. Considering the data below, one might be allowed to assume that things are finally easing out and that the sector is slowing reaching an equilibrium of sorts, coming off the highs seen in mid-2011 to rest at about US$24/Kg. But we would rather still be wary.

Since prices spiked in July 2011, there has been a decrease of about 13% in prices – which has been gradual. There are a number of reasons one can point to for this decrease – most of which we have already touched upon in our last article on pricing. To list them out:

1. Re-entering of China and Russia into European and Indian markets at competitive rates
2. Easing out of Fluorspar supplies due to opening of new mines and reduction in China’s domestic consumption

However we remain wary for 2 very specific reasons:

1. China’s summer approaches.
   
   In our very first article on pricing, we specifically highlighted the impact that the Chinese summer was having on PTFE prices. Summer months spike domestic demand for refrigerators and air conditioning and consequently cause R22 to be diverted from PTFE and into these products. This creates the shortage in R22 and was one of the root causes for the price escalations seen last year. However, we also postulated that once summer passes, the prices would ease out – which they have. But what now? Summer is about 2 months away and there is nothing to suggest that the rest of the world’s fluorspar mines can support the industry as yet. Our own sources indicated that it would be at least 2 years before the re-opening of mines in Mexico and South America eased the supply side constraints on fluorspar.
   
2. The PTFE industry is far from efficient
   In finance, we always assume that if an event (like China’s summer) is imminent and the effects of that event are known – then the prices of goods linked to the event should already reflect this information. In other words, if processors were aware that prices are going to spike during the Chinese summer, they would already have stockpiled raw materials to avoid against it, implying that there would be less demand during the summer and prices would not escalate again. However, this is unlikely to have happened since, (1) there are mixed opinions on whether the prices will go up or keep going down and (2) processors have already had to triple their working capital in order to keep up with the price increase in raw materials and it is unlikely that too many would have funds to stockpile materials for a full quarter. Therefore we remain nearly as exposed as we were last year.

But the news may not be all that bad. For one, China has been seriously implementing the R22 phase-out and as of August 2011 was even awarded a grant to speed up the efforts. Whether this phase-out sees any immediate impact on domestic demand remains to be seen and would possibly define the price of PTFE for the next few years. Secondly, there would be good reason to believe that PTFE resin manufacturers have hedged against such a scenario – even if the processors themselves are unable to do so. In India, our local producer has not only augmented PTFE resin capacities, but also become one of the foremost global producers of R22.

In a nutshell, the state of the future depends largely on the balancing of the Chinese summer against the precautions taken by resin manufacturers to safeguard against a further spike. I do not believe processors have any real part to play in all this – we remain, for the most part, price takers. If there is a fluctuation in prices, we would need to absorb it much the same as we did last year.