No way back for VSF with significant cost growth

Since 2023, with the expectation of economic recovery after the relaxation of the epidemic, VSF has started to recover moderately. However, there has been no retaliatory consumption. In the first half of the year, VSF did not show any aggressive performance. After entering the slack season in Jun, the market participants became more worried, and prices witnessed a significant decline, dropping below the early year level by the end of Jul.

During the slack season of Jun and Jul, although market confidence declined significantly, the circulation of goods did not shrink as rapidly as feared before. By early Aug, the inventory of VSF plants did not increase obviously, based on which we also concluded that "Sep and Oct are worth expecting". At that time, this conclusion was mainly based on the good operating data of VSF plants and the expected growth in demand during the peak season.

In the subsequent market evolution, the actual performance largely met expectations. However, unexpectedly in Aug and Sep, the prices of chemicals surged, resulting in a significant increase in the cost of VSF. VSF was under cost pressure while the price was hiking. The price of 32% liquid caustic soda increased from less than 700yuan/mt to over 1,000yuan/mt, this alone led to an increase in the cost of VSF by nearly 600yuan/mt. In addition, sulfuric acid, carbon disulfide, and dissolving pulp also experienced notable price increases. During the same period, even the price of coal showed signs of bottoming out.

Of course, the aforementioned analysis is somewhat theoretical. In actual operation, each enterprise has its relatively stable supply channels and procurement rhythms. Prices do not completely follow immediate real-time changes. Nevertheless, the cost increase of VSF in the past two months is still clearly visible.

This provides new references for the operation in Oct. Although concerns remain in the performance of the industry chain's end-user market, considering the low inventory of VSF and the marked cost increase, it is still not advisable to be aggressively bearish in the short term.