Will polyester yarn operating rate fall sharply amid high inventory and huge losses?

Entering November, the frequent outbreak of the epidemic in many places has made the already weak textile industry even worse. Guangzhou Zhongda Textile City has gone into lockdown since October 24th, which enables us to see that the market demand is gradually weakening. The operating rate of yarn mills in Jiangsu, Zhejiang, Fujian and Guangdong markets declined simultaneously. Specific to polyester yarn, the situation is also not optimistic. Unlike the same period of previous years, yarn inventory continued to pile up this year, and reached to an average of over one month since the end of September. At the same time, production cut gradually increased, making the operating rate dropped to around 53%.

So why do yarn mills maintain production instead of suspending production right away considering the high inventory and great loss? There are more factors to consider from the perspective of the enterprise. First of all, unlike the production suspension in July, which was deemed to reopen in August, a holiday now means to resume works after the Spring Festival, and the three-month holiday is a big decision for any enterprise. Secondly, most mills have already cut production more or less recently, making the overall operating rate at around 53%, which is already lower compared to 66%-68% in the previous years. In addition, PSF futures have helped many mills avoid the risk of falling raw materials, which can offset the actual loss of yarn. And most spinners have no financial pressure, thus high inventory and loss are not sufficient for them to suspend production.

The regular operation of the yarn mill under the current market is as follows: when the inventory is low, spinners run at full capacity, cut production gently when the inventory is high, and step up production curtailment when inventory is extremely high. When trades turn better, then increase the operating rate accordingly. Overall, spinners won’t resort to production suspension easily. However, after entering November, a few yarn mills were seen closed, mainly small yarn mills or OEM yarn mills, in particular in Hebei Jinzhou, Jiangsu Jiangyin and Zhejiang Wenzhou. As “Double 11” shopping festival draws to an end, and the cold winter approaches, market players hold bearish outlook and lack confidence on the late market. Therefore, production cuts and holidays will continue in the near future, and the operating rate is expected to drop to around 50% by the end-Nov and early-Dec, yet more mills are supposed to maintain the operating rate until January next year.