Cotton, PSF and VSF under pressure with downstream O/R falling below 50%

VSF operating rate has fallen to a decade low of 55% and the average run rate of pure rayon yarn was just above 40% in Aug, just next to the lowest level of Feb 2020 when the COVID-19 broke out. The operating rate of rayon fabric has also dropped to the similar level as it was during the National Day holiday of the past years and the entire industry chain is facing the same sales difficulties and loss-making pressure, coupled with the power rationing caused by the rare high temperature in Jiangsu, Zhejiang, Sichuan and Chongqing, most plants are semi-actively semi-passively "lying flat".

Due to the high price of raw materials, the theoretical losses of VSF and rayon yarn are around 1,000yuan/mt, and prices are still under downward pressure. To each segment of the industry chain, feedstock procurement faces the risk of falling prices, spun yarn and fabrics may be unsalable and become the stocks, which will be depreciated and occupy funds in the meantime. At the end of August, orders for the second half of the year have not been released, which is basically in line with the market's expectation that end-user consumption will continue to be weak in the short and medium term. Even if there is recovery during September-October, the growth will be limited.

In fact, the status quo of the textile industry is common. Under the dual pressure of inventory and loss, the operating rate of 100% cotton and polyester products, including blended varieties has fallen below 50%. Inventory of one month or more means weak end-user demand, which is great financial pressure for yarn mills. In addition, production costs may remain high, which may lead to inventory depreciation.

Recently, prices of raw materials start to go down, vortex-spun and ring-spun yarn sales are partially reflected to improve. On the one hand, it can be expected that the raw material will continue to fall to ease the cost pressure, and on the other hand, it is expected that the releasing orders will boost sales and alleviate the inventory burden. At the same time, production control may also be appropriately extended according to market performance.