Where has VSF gone?

VSF unexpectedly ushers in a good start in new year as VSF plants gradually adjust up offers and some of them even limit the orders, leading to tight supply on the market. It is not surprising to see the tightness because VSF was just sold on large quantity during the last week of 2021 when the trading volume exceeds 400kt, according to conservative estimation. However, it is difficult for some spinners with less feedstock inventory to source fibers when replenishing stocks.

In fact, there are no big changes in downstream segments of the industry chain from the beginning of Dec and a few fabric mills will even be closed for Chinese Lunar New Year holiday starting mid-Jan.

Rayon yarn mills are running with higher operating rates in Dec with an increment of almost 10% compared with Nov. At the same time, 2021 is considered to be the year of best profits in the past decade and even the best in the past 20 years, according to some market participants. The generous profit is easier to make spinners be optimistic and have stronger purchasing power.

As for VSF, the operating rate in Dec also improves by around 10% on the month, so the supply and demand is theoretically balanced. However, we should realize that supply and demand≠production and consumption. The upstream and downstream operating rates are just reference indicators of supply and demand, which are not simply equal to supply and demand. The Chinese Lunar New Year is approaching and spinners will be closed for holiday while VSF plants will keep running, so VSF plants will generally sell fibers in advance in order to avoid higher inventory after the holiday. That will lead to much higher supply than output in the short run and the worry about oversupply firstly emerges in the market, so VSF plants take the initiative to adopt sales promotions.

What is slightly beyond expectation is that spinners with proactive purchasing mentality and strong purchasing power eventually release the demand much more than normal consumption, resulting in partial supply shortage.

It is qualitative analysis above and let us see the supply gap based on quantitative analysis. At the end of Dec, VSF plants generally expected to have pre-sales after the Chinese Lunar New Year, which is about 300-400kt. Coupled with more than 200kt of inventory, the actual supply of VSF plants is just above 500kt. However, spinners intend to build up stocks for 1-quarter consumption and even if the holiday is taken into account, the actual purchasing volume may reach 700kt, which will lead to a supply gap of 200kt.

Of course, such demand does not require immediate delivery of the physical objects, but mostly the transaction of property in goods. Since the property in goods planned sales has been unevenly transferred to downstream sector, VSF plants are unwilling to sell more property in goods, but some spinners with less procurement are still inclined to increase feedstock inventory, which has led to supply shortage.

Therefore, the real shortage of VSF is the property in goods corresponding to the price instead of physical goods. In fact, VSF plants still have a considerable amount of physical inventory at present that can fully meet the demand of downstream production.

What impact may be brought by such shortage?

Marginal pricing is likely to occur in the future. VSF plants with sufficient pre-sales will be under smaller selling pressure and the price will be adjusted up with limited quantity, but some buyers with less feedstock inventory may keep purchasing VSF at new prices, thus a small number of buyers will determine the high point of VSF price.

What will be the high point?

It finally depends on the trend of yarn. If rayon yarn can maintain reasonable profit compared with other yarn varieties, those buyers will continued to chase up. Once the profit of rayon yarn is too low, they will stop purchasing or even switch to other varieties and the market will be at a stalemate to wait for new round of changes.

From the current point of view, the profit of rayon yarn is considerable and the upward trend of VSF is basically confirmed.