Impact of "Uyghur Forced Labor Prevention Act" on viscose industry

The US began to implement "Uyghur Forced Labor Prevention Act" on Jun 21, requiring companies importing goods from China’s Xinjiang province to provide “clear and credible evidence” that no components are produced using slave labor.

According to visits and investigations by CCFGroup in Xinjiang, no signs of illegal forced labor of the Uyghurs in Xinjiang have been found by the companies under investigation. Therefore, we will not comment on the law from a political or diplomatic perspective in this article, and will focuses on the impact on the viscose fiber industry given the fact that the act has been implemented.

Impact on Xinjiang's viscose industry

This act is different from the ban on Xinjiang cotton last year, which targets all products in Xinjiang, including VSF and rayon yarn and will theoretically exert negative impact on VSF industry in Xinjiang. For example, in the products that eventually flow to the US, the use of viscose and related products from Xinjiang may be reduced in the supply chain.

But this effect is actually not much worrying. At present, VSF capacity of Xinjiang at 950kt/yr accounts for less than 20% of the total in China. Most of the products are absorbed locally in Xinjiang, and downstream products basically flow to other provinces of China. A small amount of products are mainly exported to Southeast Asia, South Asia and Africa, with few ones to the US.

From the perspective of detection, it is a standard industrial process for the production of imported dissolving pulp used as the raw material of viscose products, and it is basically impossible to detect where the VSF is produced, which can be hardly detected after being made into clothing with a long industrial chain. In terms of supply chain, as mentioned above, Xinjiang products do not take up high percentage, and the proportion of products flowing to the US is very low. Therefore, it is difficult to determine whether the Xinjiang-produced products have been used or not even if tracing among the supply chain.

Impact on the overall viscose industry

The positive impact on viscose industry may be mainly reflected in two aspects:

1. The supply chain seeks substitutes. In China, both the official and the private sectors cannot agree with "Uyghur Forced Labor Prevention Act", but under the relatively normal situation of Sino-US economic and trade relations, the clothing supply chain will still maintain cooperation with the US and the supply chain will still respect US laws in trade with the US. The application of Xinjiang cotton may be greatly reduced, and as a supply chain, it is inevitable to find substitutes. In addition to seeking Chinese inland cotton and US cotton, it is an option of using other fibers and part of the demand may turn to viscose industry.

2. The possible changes in cotton-VSF price spread. At present, Xinjiang cotton accounts for about 20% of the global cotton output, and is relatively high-quality cotton. If there is less circulation in international market, it will inevitably lead to tightness of US cotton. This factor may lead to widening price difference between cotton and VSF outside China as well as increasing consumption of VSF abroad. Of course, other influencing factors should be taken into account when estimating the price, and the simply new act does not impose decisive impact for the time being.

There is opposite situation in China. The competition in China may be intensified after Xinjiang cotton loses some market share outside China, lower cotton prices, and there may be narrowing price gap between cotton and VSF when cotton price is falling, so it is relatively unfavorable for VSF in terms of domestic demand.

In addition to the above factors, the policy intervention on cotton is also worth noting, including but not limited to state cotton reserve, quotas and subsidies, etc. The specific situation still needs further observation.