Fitch: Foreign Polyamide Resin Players Threaten China Locals
China-based PA resin players have suffered top-line revenue falls and profitability erosion due to the slowdown in China's auto-market, as the auto-sector is the largest terminal application for PA resin. However, Fitch expects China's overall auto-sales volume growth to improve in 2016 from the previous year due to a low-base and recovering consumer sentiment. Auto-sales volume expanded by 8% yoy in 1H16, and Fitch forecasts a 5% compound annual growth rate (CAGR) in auto-sales volume by 2020, from 4.7% in 2015.
Operational recovery is likely to be more difficult for the majority of China-based PA resin players as foreign players continue expanding their capacity in the country, intensifying competition. Fitch does not foresee a quick recovery in PA resin prices, particularly for PA6, which have been dragged down by ample supply and low raw material costs. Thus, Fitch expects the profitability of China's PA resin players to remain weak, as the price falls will only be partially offset by lower feedstock prices. Fitch forecasts the Brent oil price at USD42/barrel (b) in 2016 and USD45/b 2017, while thermal coal prices are forecast at USD50/tonne (t) in 2016 and USD52/t in 2017.
US-based E. I. du Pont de Nemours and Company (A/Negative Watch) announced in July 2016 that it has expanded its capacity in China by opening its largest engineering plastics compounding plant in Shenzhen. The site produces a variety of products, including PA resin, for the automotive, industrial, consumer and packaging markets in China and the wider Asia-Pacific region.
Another US-based company, Invista, a world-leading producer of PA66, announced in April 2016 that its 215,000 ton hexamethylene diamine (HMD) plant has officially started operation in China, with terminal application in air bags, auto parts, carpets, coatings, workout apparel and outdoor equipment. HMD is a key intermediate raw material used to produce PA66 polymers and fibres, polyurethanes and high-performance polyamides.
China XD Plastics Co Ltd (XD Plastics, B+/Stable), a top-10 local PA resin player, generated 45% of its total revenue from modified PA6 and PA66 in 1H16. The company's revenue for modified PA products recovered by 21% yoy in 1H16, from a 19% slump in 1H15, primarily due to better sales volume growth. However, its average selling prices for modified PA products continued to decline, but at a much slower pace. XD Plastics' consolidated operating EBITDA margin eroded to 17.5% in 1H16, from 18.1% in 1H15, primarily due to the weakness of its plastics alloy products. We expect XP Plastic's net leverage to increase in 2016, with net debt/operating EBITDA of around 2.1x in 1H16, from 1.5x at end-2015.
In addition, Shenma Industry Co., Ltd., which held around 48% of China's PA66 chip capacity in 2015, continues to see revenue decline, with a 4% yoy fall in 1Q16.