How to treat low price of lyocell?

Lyocell fiber has achieved great success in the Chinese market since the beginning of this century, with the regular price of international brand lyocell remaining above 20,000yuan/mt for a long time during its peak.

The huge demand and lucrative profits have attracted the attention of Chinese fiber manufacturers. China began to achieve large-scale industrial production in 2015, and the scale has nearly doubled in recent years. Currently, China has a production capacity of over 500kt/yr.

However, during this process, the price of lyocell has continued to decline, first falling below the price of cotton, and by mid-2024, it even began to be below the price of VSF. The current regular transaction price is just above 13,000yuan/mt. As a high-quality fiber with high expectations, this price performance has indeed surprised many people.

Why has there been such price performance? Firstly, all price performances are essentially reflections of supply and demand relationships. Why has the supply and demand relationship of lyocell led to lower prices? We believe that the key reason is the asymmetrical cognition of lyocell's value among different links in the industry chain.

The first to recognize the value of lyocell fibers are definitely fiber companies. It is precisely based on their full recognition of the value of lyocell fibers that fiber companies will diligently invest in various aspects such as capacity, application, and promotion. This recognition, based on value and long-term development potential, makes the fiber end more actively provide more fibers to the market.

From the backend perspective, there are differences in the comprehensiveness and timing of market recognition of the value of lyocell fibers. How did these differences arise?

From an objective perspective, enterprises have path dependencies, and the main downstream industries of lyocell are textile enterprises or non-woven fabric mills. Generally, these enterprises have existed for many years and have their own inherent raw materials, processes, and markets. They have relied on these for good business operations over the past many years, which objectively determines that it is difficult for downstream industries to quickly and fully understand and rely on lyocell.

Subjectively, although the current competitive environment is becoming more intense, these enterprises are also seeking new fibers. However, on the one hand, they rarely bet their entire future on lyocell alone, and on the other hand, downstream enterprises are relatively scattered, making it difficult for them to ensure that they will have a more significant advantage in using lyocell. Some large enterprises have handled this well, such as Xinhuayuan located in Fujian. It started experimenting with the use of lyocell in large quantities before 2020, and currently, the peak monthly usage exceeds 10kt. The products have formed its own unique competitiveness in the home textile market, and the smooth progress of this investigation is based on the support from Xinhuayuan. Of course, there are many similar enterprises in the market, such as Baoda and Jingyi located in Jiangsu. The current problem is that not every enterprise in the spinning and weaving segments can be like Xinhuayuan.

Why does the difference in value cognition lead to an imbalance between supply and demand, which in turn leads to a decline in prices? Or why is a price drop an effective choice for fiber companies in certain stages?

Lyocell has many values in terms of performance, environmental protection, and style. During the yarn expo last week, Mr. Liu Tao, one of the world's leading lyocell producers from Sateri, also accepted our interview, and he fully introduced the fiber. The challenge is that many textile enterprises cannot immediately realize these values. What we want to say is that although these textile enterprises cannot fully understand all the values of the fiber, they can still accept some of the characteristics of lyocell based on their experience, such as the standardization of lyocell fiber specifications, high fiber strength, and similarity to cotton. Therefore, they are still willing to try this fiber.

However, due to insufficient cognition of value, the price they are willing to pay is only the price corresponding to the part of the value they recognize. We mentioned earlier that there are differences in the timing of recognition of fiber value between the upstream and downstream of the textile industry chain. Based on full recognition, the fiber end has formed sufficient supply. However, in the case of asynchronous downstream cognition, even these demands that cannot fully realize value cognition are also needed to be seized by fiber enterprises. Fiber companies need to grasp these demands on the one hand to achieve effective turnover of fibers and ensure the financial operation of enterprises. On the other hand, these enterprises' cognition of the value of lyocell cannot remain unchanged. With the use of lyocell in textiles, manufacturers initially focused on increasing the raw material components and reducing costs. However, they gradually discovered some unique styles of lyocell products, which in turn led to a proactive use of lyocell to pursue product selling points. Theoretically, this is entirely possible. Indeed, such cases have repeatedly occurred in recent years, especially among pure cotton textile enterprises.

We do not wish to discuss whether there is an excess of lyocell, as for a fiber with such rich value, discussing overcapacity with only a million-ton scale in the context of the global annual fiber consumption of 130 million tons is undoubtedly arbitrary or one-sided.

Some experts have pointed out that the price drop and disordered competition are somewhat related, and we cannot deny this viewpoint. However, we prefer not to use this term because criticizing companies without solving their financial turnover issues is unlikely to be helpful. Moreover, these companies' operators are often investors themselves, who likely prioritize profit over any analyst. At times, intense competition is unavoidable, and what we aim to do is to analyze the market with them. During phases of unnecessary intense competition, companies should make more rational decisions, free from emotional or rumor-based interference.

Certainly, the challenges we face may not only stem from cognitive asymmetry but also from the need to improve processing, technology, and equipment capabilities in the backend of the industry chain. For instance, in dyeing and finishing, while some strong enterprises have already managed lyocell fabrics well, there still seems to be a lack of printing & dyeing companies capable of handling lyocell as effectively as other fibers. The market needs to attract more printing & dyeing enterprises.

Regarding the realization of lyocell fiber's value, it is worth mentioning that international companies have successful cases in this area. Austrian company Lenzing, for example, has been quite successful with lyocell. Over the past years, the Tencel? brand has at times become synonymous with lyocell fiber. Even now, some market participants still do not use the term "lyocell" correctly in certain parts of the industry chain. One key to their success is their thorough exploration of lyocell's value throughout the entire chain from fiber to clothing. According to CCFGroup's observations, their customers rarely use lyocell fiber to replace other fibers but rather fully recognize and exploit lyocell's characteristics. Consequently, both the fiber and the backend products, including clothing brands, can achieve certain premium.

China has the world's largest supply chain and the strongest consumer market. If our supply chain and brands can fully realize the value of lyocell, we believe that both the fiber scale and future bargaining power of lyocell have significant growth potential.

A positive sign is that at the international yarn/fabric/clothing exhibition held in Shanghai last week, lyocell fiber has become a focal point. At booths such as those of Sateri, CTA, China High-tech, and Tangshan Sanyou, there has been strong interest in lyocell fiber. This enthusiasm is likely to bring a small peak in the near future, helping to more fully realize the value of lyocell in the industry chain. More directly, lyocell prices may have the potential to adjust upwards with better applications.

As a professional research institution, CCFGroup has an obligation to make more efforts in the development of these green fibers. We have already held Lyocell Industry Forum for four years to introduce lyocell's development, future, and share usage experiences with our clients. We regret that our efforts in this area have been insufficient in recent years. In the future, we hope to interact more with the industry participants, and any comments or suggestions are welcomed.