Polyester: production curtailment may be normalized in 2022

The logistics were blocked and demand reduced sharply due to worse spread of pandemic. Warp knitting plants in Haining and DTY plants in Taicang were required to suspend production successively amid the pandemic. Polyester plants faced apparently bigger pressure from inventory and losses. Some large polyester enterprises will start scaling down production this week. If the production is reduced and other units fail to resume operation timely, the polyester polymerization rate may decrease to around 85%, which will be traced closely by CCFGroup later. We still think production cut on polyester market will be inevitable, but the progress has uncertainty.

Production cut on polyester market will be inevitable. Why?

The spread of pandemic in some regions of China since the beginning of year has greatly impacted consumption. Companies that focused on domestic sales reflected that sales of spring apparels met resistance, stocks surged and profit slipped greatly, which will affect later storage and transportation cost and further result into shrinking working capital. Textiles and apparels industry is strongly seasonal. If the peak season of spring clothes is missed, the restocking of summer and autumn apparels will be directly impacted. Export-oriented enterprises reflected that some export orders were canceled as the pandemic impacted transportation, supply chain and the express. Meanwhile, after production recovered in Southeast Asia, some medium-to-low end orders flew back to Southeast Asia. As a result, overall orders were inadequate in China.

The performance of downstream fabric market: Fabric mills witnessed declining orders. The logistics have been stunted in some fabric manufacturing bases in Zhejiang and Jiangsu due to the pandemic prevention and control. Stocks of grey fabrics kept increasing and the operating rate of fabric mills accelerated falling, which has hit multi-year low amid pandemic. Actually, orders, inventory and operating rate of downstream fabric market have been close to the level in Mar-Apr, 2020.

The operating rate of DTY plants and fabric mills sped up to decrease, while that of PFY plants sustained high, which was a big contrast. PFY plants had big pressure in terms of inventory and losses. Therefore, we think the production curtailment of polyester companies is just a matter of time.

However, the progress of production reduction also has uncertainty. Why?Polyester companies faced big pressure, while unlike last year, players were waiting for the production cut in leading enterprises. On PFY market, leading enterprises and small and medium-sized factories were waiting for the other side to reduce production at first. Therefore, we can see the production curtailment on polyester market is slow. Except for big production cut on PSF market, PFY plants seem to have stronger resilience, not reducing run rate greatly.

After the Tomb Sweeping Day, the domestic epidemic did not ease as expected, but continued to escalate. First, logistics continued to be hindered, and some polyester enterprises were forced to suspend production due to raw material transportation problems. Secondly, due to the needs of epidemic prevention and control, major DTY and textile manufacturing bases such as Haining and Taicang stopped production successively. The polyester enterprises in the region were also forced to stop production. The polyester polymerization rate dropped quickly recently as some leading producers also chose to cut the output because of the uncertainty over the future demand.

China's epidemic control is very important to domestic demand. The clothing is a seasonal product after all. The later the epidemic is controlled, the greater the drag on domestic consumption of textiles and clothing. The situation at home and abroad this year is different from that in 2020. However, even if the domestic epidemic is gradually controlled in the future this year, it will not change the dilemma of insufficient export orders and limited stimulus to domestic demand and the historically high crude oil price. Without the speculative demand and sufficient real demand, the reduction in polyester production this year may be normalized.