NFY production cut should be faster

Mainstream e-commerce platforms use "steady and good" to describe this year's Singles Day shopping festival’s sales record (in November 1-11). But the high temperature in Jiangsu, Zhejiang, Shanghai and Anhui has affected winter clothing consumption, and the severe pandemic situation in Guangdong has also suppressed demand for fiber after the shopping festival. Although there is no official data to show the specific growth rate of clothing consumption on Singles Day (Nov 11), we could tell that the booming season is over from the feedback of orders in fabric and filament plants.

In November, fabric mills have gradually reduced production, and in nylon 6 textile filament factories (short as NFY), inventory is still rising, and losses are still expanding. Many NFY mills have been unable to assess or balance risks and pressures through pricing, and production reduction has gradually become the best and only choice.

There are still nearly two months to go before the Spring Festival, and NFY mills need to make early prediction and planning as to when and how much to reduce production, whether or not to run and run at what rate during the Spring Festival. Some NFY mills already have a rough plan, while others are still waiting to see. The decision of how to arrange production needs to be combined with the business situation of the enterprise, as well as the market, demand trend prediction. As the situation in the nylon industry is clear to players, it might be wise to look for solutions by analyzing and comparing with other mainstream fiber markets.

1. NFY losses expand in H2 2022, and other chemical fibers also suffer

Cash flows of nylon DTY, polyester FDY, VSF, spandex 40D, ASF

Note: Only nylon DTY and VSF uses full cost as reference.

Nylon 6 DTY is one of the most nylon filament products sees most intense competition this year, especially DTY 70D, whose margin has been compressed to the extreme low. In the good times of previous years, the price difference between DTY 70D and nylon 6 high-speed spinning chip (short as HS chip) was more than 5000yuan/mt, and even in the times not as good it was around 4500yuan/mt. But this year the price difference has been reduced to 3500-3800yuan/mt, and recently individual sources have even been pressed to 3300yuan/mt. Such a limit price difference cannot even cover the processing cost. Near the end of the year, as demand continues to decrease and NFY factories face rising sales pressure, the ultra-low price difference is also difficult to repair. (The losses for nylon FDY, POY and other DTY specifications are not as serious as DTY 70D).

Compared with other mainstream fibers, no matter from the trend or the degree of loss, viscose staple fiber (VSF) can be regarded almost the same bad as nylon DTY. Although the loss of polyester filament is slightly smaller, if converted to full cost, it is suffering a losses on the yearly average rate, and the loss has expanded recently.

By contrast, the profit of spandex has been repaired step by step, and it is profitable based on the full cost, after reducing production and removing inventory. The time of the most serious loss for spandex has passed. The profit of acrylic fiber of the whole year is still the best, though the profit has been significantly reduced in the second half of the year.

2. NFY inventory comparatively high

In the second half of the year, NFY factories only had a wave of destock in September, but orders gradually decreased and inventory started accumulation since late October. There is also a big gap between different NFY plants, with high ones more than 40 days and low ones less than 20 days. Some NFY factories have gradually reduced production by 10-20% in November due to high inventory, bearish expectations for the December, and consideration for reserving inventory space for the Spring Festival, but this only moderates the growth of inventory, while still difficult to reduce it evidently. The average inventory of NFY is more than 30 days by Nov 25, a quite high level, though not as high as that in August.

Compared with other fibers, the overall inventory of nylon filament is on the high side. Spandex inventory was once higher than nylon, but it dropped obviously in September-October with booming consumption. Polyester inventory evidently in November, due to a large reduction in production. VSF inventory had been alleviated in September due to a sharp production cut, and the slow decline in inventory in November is mainly due to demand repair, not production reduction further. Acrylic fiber inventory remains low throughout the year, mainly because acrylic fiber capacity expansion in recent has been limited, and the export growth is faster in 2022, so its supply and demand are relatively balanced.

3. NFY production cut not fast enough

The production cut in NFY plants was limited in November, and the average operating rate narrowly reduced from 74.8% to 71% by Nov 25. Regionally, the plants in Fujian mostly ran at 70-80%, and some in Zhejiang at 80-09% while some at 50-70%, and that in Jiangsu was low in general with most small plants running at 40-50%.

In contrast, the operating rate of spandex, polyester and acrylic plants decreased significantly month-on-month in November, with an average monthly decrease of 5-10%. Only VSF plants' run rate recovered slightly in Oct-Nov, as they had cut production evidently in Sep already.

Summery & suggestions for NFY plants

To sum up, the worst product of nylon has suffered a serious loss, which is equivalent to VSF but worse than other chemical fibers. At present, the overall inventory of NFY is on the high side, but the adjustment on run rate is slower than other products, so that when the recent demand is obviously weakening, NFY factories are unable to reduce inventory effectively.

Under the epidemic, it is a common phenomenon that fabric mills stop production earlier this year, and their willingness to prepare feedstock before the Spring Festival is relatively low. If the price of nylon is not low enough, even fabric mills under good sales condition will not easily restock.

Since NFY market performance has been relatively good in the first half of the year, it will not be too difficult to go through the rough time in the second half. But this "Spring Festival" could be very long, and the risk of inventory accumulation based on current price is high, and compared with other fibers, the pressure faced nylon factory is not small.

It is suggested that NFY factories that are not integrated with upstream capacity should consider reducing production as soon as possible according to their own situation, so as to free up inventory and capital space in response to the possibly prolonged Spring Festival and turn passivity into initiative.