Polyester filament yarn producers cut prices, but processing spread maintains

China polyester filament yarn prices have risen and then kept consolidation for nearly two months. On Jul 23 morning, however, several plants announced to lower offers for PFY.

1. Product inventory increases

The price cut is directly attributed to high inventory. According to CCFGroup's investigation, product inventory at POY plants has increased to 28.9 days as of Jul 19. Then, due to the weak sales last weekend, the inventory may have reached about 1 month. The situation for PSF is better, but the inventory has also exceeded half a month.

2. Downstream plant operating rate drops

In terms of buying intention from downstream plants, it has been remaining weak since Jul. Buyers were resistant to high PFY prices, and also demand reduced. The operating rates of downstream twisting machines, weaving plants as well as yarn mills are falling, due to high temperature in Jul combined with decrease in orders. As a result, the sales of PFY and PSF are weak recently, constantly at around 40-50% and 20% respectively.

3. Feedstock price falls

It was an important precondition for PFY price hike in May and Jun, that crude oil as well as polyester feedstock prices moved up in that period. Recently, however, crude oil futures are correcting from highs, and polyester feedstock including PX, PTA and MEG futures are weighed lower by the overall decline in commodity market. It leads to a reduction in the cost for polyester.

4. Processing spread maintains good

With feedstock price correcting, PFY and PSF maintain relatively good processing spread to the feedstock. For PFY plants, it is not necessary to stick to the price, but it could be more beneficial to keep the processing spread while controlling the inventory.

It is the first time for the leading PFY plants to cut prices by 200-300yuan/mt in nearly two months. Then, does it mean the new model of production reduction to maintain prices by leading plants become ineffective? It is still effective.

Firstly, the price cut today is jointly implemented by leading enterprises, the prices maintain consistent, and there's no discount available. Secondly, this price cut comes as a result of continuously falling oil prices and gradually reduction in the cost of polyester feedstock. The price cut is conducted when PFY to PTA price spread is widening obviously, and the model of production reduction to maintain prices is based on the price spread rather than the price. Therefore, it is reasonable to lower prices while maintaining a certain price spread.

Additionally, leading enterprises continue to expand the reduction of production. However, in practical operations, to ensure the stability of polyester units and mitigate the cost increases associated with production cuts, there has been some operation of switching from PFY to polyester chips, resulting in a more significant decline in PFY operating rate than that in overall polyester operating rate.

Since July, the combined effects of the off-season and falling oil prices have significantly reduced downstream buying intention. For nearly half a month, downstream players have mainly maintained a wait-and-see approach, and consumed from stocks. The performance of PFY sales has also been relatively poor during this period. And at the same time, PFY stocks at downstream plants have dropped again to a low level for the year. Recently, some procurement has started to emerge, and after today's price cuts, a large-scale procurement from downstream is expected to emerge, which will greatly help alleviate PFY inventory pressures. PFY sales to production ratio in recent two days should be watched closely.

Overall, we believe that the new model of leading PFY enterprises remains effective. Although this price cut is unexpected, it is still reasonable. If this price cut can significantly alleviate inventory pressures during off-season, then PFY profit could further improve with demand picking up in mid or late Aug.