VSF ready for price hike?

The market is always a collection of complex elements that rarely points to clear bulls or bears. We need to qualitatively determine the long and short positions of different elements and analyze them quantitatively.

Since the information is complicated and there are interactions among the elements, we much immediately find out the core elements that affect the market, or the main contradiction in the market.

The core element of the market from the end of Aug to the beginning of Sep is the inventory of VSF plants. Since the stocks keep increasing, VSF plants are under bigger pressure of destocking and price slump is an expected issue.

However, there is dual control on total energy consumption and energy intensity after VSF price drops significantly and there are increasing variables in the market. The inventory is still high, but it is no longer the main contradiction in the market, which is replaced by energy shortage.

The short availability of energy directly leads to falling VSF operating rate that has dropped from 78% to 60% in the past month. Although the reduction is partially caused by scheduled maintenance and profit issue, the influence of short energy support does not takes up low percentage. In addition, energy is also affecting other links of the value chain as yarn and fabric mills cut production by more than 15% with further decrease of demand, and some caustic soda plants slashed operating rates with soaring prices.

Compared with inventory and demand, cost issue caused by energy is the main contradiction of VSF at present and prices of caustic soda and coal cannot decline in the short run. Although there is room for further decline of dissolving pulp, cargoes arriving in the short term are high-priced sources ordered before. The full cost of VSF can be as high as around 14,000yuan/mt, while the actual selling rate is just around 11,800yuan/mt last week, with theoretical loss of more than 2,000yuan/mt, exceeding the peak after the COVID-19 outbreak.

Even if some fixed costs are excluded, the production of VSF will cause continued loss of cash flow. Under such circumstance, even if some market factors are bearish, VSF plants are less likely to keep selling fibers at low prices. The price of VSF will probably rise in Oct.

It is noteworthy that the leading role of cost just exists when VSF price is low. If VSF rebounds to high level, the main contradiction in the market will change again and the operation of each link shall be determined by circumstances.