Spandex: production curtailment appears again amid weaker demand

Impacted by the COVID-19 pandemic, the income of residents has slower growth rate and residents are pessimistic about the future income, showing weaker intention to consume. With weak macro environment, the demand for textiles and apparels presents sluggish. Sales of chemical fibers like PFY, NFY and spandex face apparent selling pressure and inventory of PFY and NFY sustains high. Fiber companies choose to control the accumulation of inventory by adjusting their run rate.

Spandex market witnesses sharply falling prosperity in 2022. Demand for textiles and apparels turns thinner worldwide. In addition, the demand for spandex from pandemic prevention field such as the earband of mask and protective apparels decreases. Some demand for home dress is replaced by the outdoor economy. The operation rate of spandex plants becomes more volatile when the divergence between supply and demand intensifies and raw material prices change substantially. The operating rate of spandex plants was averaged at 94.6% in 2021, while it was only at 78.3% in Jan-Oct, 2022, down by 17 percentage points on the year. Weak demand gradually weighs on upstream market. With selling pressure, some spandex plants will be forced to scale down or suspend production at the end of year.

In the first half of year, the operating rate of spandex plants was averaged at 87.1%, a year-on-year reduction of 8.5 percentage points, and it fell to 61.7% in the Q3, but rose to 81.1% in Oct. Supply of spandex tightened for a short period. However, the raise of run rate in spandex plants was constrained by delivery issue of feedstock and the expectation of weaker demand. In Nov, the operating rate of spandex plants has reduced by 5 percentage points to 78% compared with the highest level in Oct. The operating rate of large companies with more than 70kt/year of capacity was at 82%, that of companies with 30-40kt/year of capacity was at 73% and that of enterprises with capacity below 20kt/year approached 46%. Some factories plan to cut or suspend production. Therefore, the operating rate of spandex plants is anticipated to drop further. More spandex plants are expected to scale down output before the Lunar New Year holiday in 2023.

Firstly, seasonal demand has weakened after traditional peak season passed. Some fabric mills may shut down for the Lunar New Year holiday in advance due to the sporadic spread of pandemic, especially after Dec. By that time, the rigid demand for spandex will soften sharply. Distributors are anticipated to be cautious in restocking spandex amid weak macro environment. Most inventory is in the hand of spandex plants. Autumn and winter fabrics gradually finish delivering. There are inventory of light fabrics impacted by the worse spread of pandemic in the first half of 2022. With falling feedstock price, the placement of orders for light fabrics is slow, and intensive production may appear after the Lunar New Year holiday. Current inventory of spandex is still below one month while the accumulation may speed up if the production is not slashed but demand is worse than anticipated, not ruling out spandex inventory to rise to near 60 days three months later. Slashing operating rate will slow down the accumulation speed of inventory when demand is feeble.

Secondly, spandex capacity is estimated to see more than two-digit growth rate in 2022 while demand for spandex is anticipated to witness negative growth in Chinese mainland. Supply of spandex is in surplus for most of 2022, only being tight for a short period in traditional peak season in Sep and Oct. The gap between production and sales expanded in early-Nov. Some new spandex units which are scheduled to start operation in Q4 2022 will be delayed. As a result, the capacity of spandex may rise much in 2023 and supply surplus is anticipated to remain.

Thirdly, the inventory of spandex has risk to devaluate. Spandex plants suffered great losses in end-Q2 and Q3 when price of BDO and PTMEG collapsed. Price of BDO and PTMEG dived again under weakness. Thus, the inventory of spandex faces risk to rise and will be depreciated.