PFY: some speculative downstream demand goes ahead, orders stagnated

1. End-user demand in the first half of the year and the outlook for the second half of the year

In terms of domestic demand, the retail sales of textiles and apparel increased by 2% compared with the same period of 2019 in Jan-May, 2021. However, it was mainly due to the pandemic during the Chinese New Year period from January to February, which caused consumption to slow down. Domestic demand recovered from March to May.

In terms of exports, the contribution of epidemic prevention demand has declined, the growth rate of textile exports has gradually dropped, while the demand for traditional clothing has risen, and the growth rate of clothing has been at a high level.

As for overseas demand, with the easing of the pandemic, the growth rate of apparel retail in Europe and the United States has rebounded. Among them, the United States has recovered strong momentum. The growth rate reached 700%+ in April and 200% in May. The retail growth rate from January to May increased by 4.7% compared with the same period in 2019, which has recovered or even exceeded the level before the pandemic. This was also related to the local money distribution.

At the same time, exports in Southeast Asia were not optimistic due to the epidemic in the first half of the year. From January to March, India's clothing exports fell by 15% compared with the corresponding period of 2019. From January to May, Vietnam's textile and clothing exports reduced by 3.8% compared with the same period of 2019. From January to April, Bangladesh's textile and clothing exports slipped by 7.3% year-on-year in 2019. The exports of the top three textile and apparel exporters in Southeast Asia were not as good as the same period in 2019.

However, in the first half of the year, Pakistan and China's textile and apparel exports both showed significant growth. From January to April, Pakistan's textile and apparel exports increased by 17.2% compared with the same period of 2019, and China's textile and apparel (excluding masks and protective clothing) rose by compared with the same period of 2019. It shows that while demand in Europe and the United States is improving, countries with better epidemic control have successively accepted some transfer orders from India, Bangladesh and other places. Of course, transfer order is mainly for finished garments and home textiles, and the fabrics are directly purchased domestically.

On the demand side, both domestic and export sales performed well in the first half of the year, especially the export data. From the micro data point of view, downstream fabric manufacturing and twisting markets have big new expansion. Meanwhile, export was slow affected by high sea freight and tight containers. Profit was low and stocks were high. From the perspective of demand trends, domestic sales have basically returned to pre-pandemic levels, and are in a trend of steady growth in the second half of the year, but they will not grow explosively like the second half of last year. (The pandemic suppressed demand release in the first half of last year, leading to concentrated outbreaks in the second half of the year. The expectation of cold winter and low bottom hunting also stimulated demand). Although export sales still enjoy growth potential, the problems of high sea freight and shortage of containers still restrict the growth. In addition, after the relief of the pandemic in Southeast Asia, it will also lead to the flow-back of orders.

Regarding the end-user demand in the second half of the year, we believe that although there are some unfavorable factors, generally cautious and optimistic mindset is held. 1. Demand is expected to increase in the second half of the year, but the profit of fabric mills may be restricted, because of the substantial expansion of fabric manufacturing and twisting capacity and pressed foreign trade orders amid high sea freight. 2. This year’s peak season will be released intensively in a certain period of time, but the duration may be not very long, because the entire industry chain has been operating at a high level since the first half of the year, and the inventory is constantly accumulating. Many downstream players make preparations for the second half of the year. Once demand starts, these stocks will be quickly digested, shortening the duration of the peak season.

2. Operation and mindset of downstream fabric mills at this stage

The downstream business is in the off-season as a whole. Sales ratio was hard to reach 100%. The stock of grey fabrics continues to rise and is at a high level. A small number of products perform well, such as spandex-related stretch cloths such as water-jet 2-way elastic fabrics, T400 and other related varieties, and down jacket fabrics like high-density polyester taffeta, pongee. Demand during the traditional peak-season is supposed to show signs to improve at least in late-Jul, so it still takes time to wait.

Operating rate of downstream fabric mills has declined recently at a high level, mainly due to the emission limit policy in Wujiang, and the implementation of the power curtailment policy on some high-energy-consuming enterprises in Haining. The slight reduction of run rate in other region was mainly because of the inventory burden. The operating rate of downstream fabric mills plants is in a seasonal decline, but the decline is relatively slow, and the absolute operating rate is still higher than that in previous years. In the later period, the situation of power curtailment in summer should be noted. In the future, whether the power curtailment measures in Jiangsu and Zhejiang will be expanded with heater weather should be noted. If the power is curtailed, the operating rate of downstream plants may apparently decline.

Recently, driven by the strong rise of upstream raw materials, some downstream speculative demand has risen. Some large downstream companies with financial strength have increased replenishing last week, but the downstream orders have not improved significantly at present, and the continuity of speculative replenishment mainly depends on the strength of the upstream raw materials. Once the raw materials weaken, the downstream players will wait and see, and speculative replenishment is expected to come to an end temporarily. However, in the early stage of the peak season, the downstream buyers have hoarded up some stocks. Therefore, for the upstream polyester filament yarn market, the inventory pressure has peaked at a high level and will gradually decline in the future.

Generally speaking, as long as there is no extreme change in the raw material market, demand is still expected to be resilient in the second half of the year. The downward room of polyester and downstream plants' run rate will be limited. Market players mainly wait for the start of the peak season on end-user market, while some speculative demand already goes ahead.