Can VSF usher in a warm spring?

Affected by the macroeconomic recession and COVID-19, China's textile industry is likely to have an unprecedentedly long Chinese Lunar New Year holiday since the 21^st century. According to recent market feedback especially that from weaving, dyeing and finishing segments of the industrial chain, there are rumors about taking a holiday ahead of time by enterprises in many areas nationwide. Judging from the investigation, some companies may start to take a holiday since mid-Dec, but according to the actual situation, the vacation may not start as early as they have announced.

It is a big deal of taking holidays by enterprises. Finance, personnel, safety, energy, supporting facilities, corporate image, related responsibilities and other issues need to be considered, and it is by no means a simple cost calculation. Since there are still 54 days before the Chinese Lunar New Year (Jan 22, 2023), even though some companies have already begun to make relevant considerations, there are still large variables in the actual implementation. But what is basically certain is that the Chinese Lunar New Year holiday of 2023 may be significantly advanced.

Assume that spinners gradually start to have holidays at the end of Dec. Take VSF for example, what does this mean?

At present, VSF output in Chinese mainland is just above 9kt per day, the consumption of which is about 8.5kt, and others are for exports. In extreme cases, if downstream companies rush to take a holiday at the end of Dec, the daily consumption may drop to about 3.5kt. However, chemical fiber enterprises generally maintain continuous production during the Chinese Lunar New Year holiday, including VSF plants, which means that VSF inventory may increase by 5kt per day without production cut. By mid-Jan, the consumption by downstream plants may further drop within 2kt, and the inventory growth of VSF plants may rise to more than 6kt per day.

According to experience, downstream enterprises may resume operation around the tenth day of the first lunar month. Assuming that the resumption of work in 2023 maintains a normal pace, most plants will resume operation around Feb 1, which means that the holiday would last more than 30 days and VSF plants may have to bear the inventory growth of over 170kt, then VSF will be obviously challenged from two aspects:

1. Storage capacity. The inventory of VSF industry is more than 200kt currently, which is estimated to be more over 280kt by the end of Dec and may exceed 450kt after the Chinese Lunar New Year holiday. From the perspective of storage capacity, it is an unbearable level for the current industry. Under normal circumstances, the storage capacity of the industry is generally within 300kt, and it has to rent external warehouses or pile up in empty spaces if the figure is bigger than 300kt. Considering the current unbalanced operating rate of the industry, the increasing inventory is likely to be concentrated in few companies, which further intensifies the storage capacity challenges of these companies.

2. Funds. The turnover rate of funds will decline significantly with the increase in inventory. After suffering long-term losses, the occupation of such funds will obviously pose further challenges to the financial situation of VSF companies.

At the beginning of the year, some enterprises can obtain the loan quota for the new year, and theoretically speaking, the funds can be expanded indefinitely, so the storage capacity may become the weakness currently, instead of the funding problem. Then how to deal with the weakness? Three methods can be taken as reference.

1. Transfer inventory to downstream sector. Transfer part of the stocks to be piled up in Dec to downstream sector through pre-sale, which is necessary to spur downstream buy interest in advance. How to stimulate downstream buyers when they also face triple challenges of capital, storage capacity, and expectations is the question that companies need to think about.

2. Reduce output. Output reduction can slow down the growth rate of inventory, which is undoubtedly an effective and relatively easy method. However, the current operating rate is already at a low level. Due to some comprehensive reasons, it is difficult for some enterprises to further cut run rates. Other companies are also hard to quickly adjust the operating rate when the comprehensive benefits are tolerable. Whether there will be a forward-looking suspension or reduction of production later needs further observation.

3. Expand the storage capacity. After the first two points have been treated accordingly, companies may still need to actively deal with the inventory likely to emerge. Considering the inconvenience of business work during the Spring Festival, some external flexible storage capacity may need to be fully planned in advance.

As a part of the industry, we hope that the industry will return to a healthy operating track as soon as possible. Only if facing the status quo more rationally and calmly and actively meeting challenges can enterprises usher in a real spring and warm sunshine.