VSF: time for aggressive gambling?

During the first week of Dec, the main VSF plants were still visiting the market to learn more about downstream situation and make some preparations for the pre-holiday sales. Although no one may admit, most sellers at that time probably lacked confidence in consideration of the longest Spring Festival holiday in history. At the same time, VSF plants that will maintain continuous production during the holiday have been obviously aware of the possibly huge inventory burden.

Downstream plants are also aware of this, and some spinners began to undersell a large amount of rayon yarn since the first half of the second week, especially vortex-spun yarn mills. The lower price of vortex-spun R30S had fallen to 14,000-14,200yuan/mt. Even based on the minimal theoretical manufacturing cost of 2,500-2,700yuan/mt, those spinners had to avoid suffering losses by replenishing stocks around 11,500yuan/mt. Therefore, traders on the market became relatively active buyers and the sales volume of some large-scale spinners reached 10kt. However, there was rumor about large-scale maintenance by big VSF plants midweek and the price might not be slashed before the Spring Festival, then the spinners started to become reluctant sellers at low prices.

In the third week of Dec, Sateri announced that it would limit its production by 30%, and released the price of 13,100-13,200yuan/mt on Wednesday, which was basically the same as it was at the end of Oct. Based on the calculation of that price, the loss of spinners that undersold yarn in the second week had been more than 1,000yuan/mt, and 10kt of VSF changed hands during the week would cause the loss of 1 million yuan. However, the price was less likely to plummet in the short term when large-scale VSF plants limited the production, and buyers were expected to maintain regular procurement on a monthly basis. But on Friday, the trading volume significantly exceeded expectations as large-sized VSF plants received orders with the volume of nearly 2-month production, and some spinners even purchased raw materials for 1-quarter consumption, which was confused or even surprised some sellers.

Generally speaking, a large amount of procurement is based on expectation for rising price, and such expectation relies on the improvement of supply-demand relationship, but healthy improving sales have to meet at least one of the following conditions.

From the above table, apart from the expected decrease in supply, there are no other substantial factors that are favorable to supply and demand. In the face of the objective fact that consumption will decrease during the Spring Festival holiday, it is still unknown whether supply or demand will be reduced more.

From the perspective of suppliers' cost, although VSF plants may be still losing money currently, the overall loss is decreasing. In addition, feedstock prices have been falling recently and paper pulp also slips, so the cost of VSF is still likely to drop further.

According to the acceptance of buyers, it is difficult to understand where the driving force of purchasing raw materials at the net price of around 12,500yuan/mt comes from after a large number of yarns are sold at 14,000-14,200yuan/mt by the spinners. It is heard that some buyers who sell yarns at low prices are far more aggressive in VSF procurement than the ones without underselling yarns. Any economic analysis is generally based on rationality and profit-seeking. It is difficult to understand the logic of almost actively pursuing losses in the short term. The common interpretation of the market is to stop losses, but such a decisive action is still jaw-dropping.

2022 is a painful year for the cellulose industry chain, and the performance of the middle and downstream links of the industry chain is depressed throughout the year. As a member of the industry, we hope that the demand could recover as soon as possible and the market will resume healthy operation. But we must be aware that it is based on an objective improvement in the economic environment. The relaxing of pandemic prevention and control policy has indeed released certain benefits, but whether it is enough to promote a rapid improvement in the economic environment still needs to be treated with caution. A healthy market requires stable and continuous circulation, and heavily overdrawing the future can easily lead to catastrophic consequences. There is no need to be overly pessimistic at present, but it may not be the time for aggressive gambling.