Polyester industrial chain points to better direction after holiday

Better atmosphere on macro and crude oil sectors

During the National Day holiday, U.S. non-farm payroll and other economic data exceeded expectations, leading to a slowdown in the anticipated interest rate cuts. Meanwhile, geopolitical conflicts escalated beyond expectations, with Iran launching multiple missiles at Israel, pushing crude oil prices to rise for five consecutive days, reaching a six-week high. Brent crude prices surpassed $80/bbl.

Domestically, positive macroeconomic signals were released at the end of September, warming up the commodity market. On October 8th at 10 AM, the State Council Information Office of China held a press conference where the National Development and Reform Commission discussed the implementation of a package of incremental policies.

In the industry, costs and demand are rising, further repairing processing margins under low inventory conditions.

On the demand side, sales of grey fabrics in September, known as the "Golden September," did not meet the expectations of a peak season due to the continuous decline in raw material prices, leading to a cautious sentiment among domestic and international downstream customers. However, by the end of September, with the release of favorable macroeconomic signals domestically and a relatively strong atmosphere for raw material prices, some varieties began to see order releases, and downstream grey fabric sales started to pick up, primarily focused on fabrics for autumn and winter clothing, while demand for home textile fabrics showed weaker performance.

Operating rate of downstream plants increased instead of decline during the National Day holiday and extended higher after holiday in Zhejiang and Jiangsu. Operating rate of DTY plants sustained at 93% in Zhejiang and Jiangsu, above 90% in Xiaoshan, Shaoxing, Cixi, Changxing, Changshu and Taicang. Operating rate of fabric mills ascended to 83% in Zhejiang and Jiangsu: near 90% for water-jet mills in Wujiang, near 90% in North Jiangsu, above 90% in Changxing; the run rate of warp knitting plants was above 90% in Haining and around 60% in Changshu. The run rate of circular knitting plants in Xiaoshan and Shaoxing from Zhejiang was above 70% and was at near 50% in Changshu, Jiangsu. Operating rate of printing and dyeing plants increased to 84% in Zhejiang and Jiangsu: near 80% in Wujiang, at 80-90% in Xiaoshan and Shaoxing, around 90% in North Jiangsu and Changxing, around 80-90% in Haining and below 80% in Changshu.

Sales of grey fabrics is expected to push up regional operating rate in October. Sales of knitted fabrics are better than those of woven ones now, and sales of fabrics for apparels outpace those for home textiles. Stocks of autumn and winter apparels decrease. Sales of warp-knitted fabrics in Haining and circular knitted fabrics in Xiaoshan and Shaoxing were especially good and stocks fell smoothly, while the destocking lacked momentum in other regions. Comprehensively, the inventory of grey fabrics has fallen to below 28 days in Zhejiang and Jiangsu.

Downstream plants increased replenishing fibers under high operating rate and rising cost. The inventory of PFY and PSF was transferred to downstream sector. By now, the comprehensive inventory of PFY in DTY plants and fabric mills was around 19 days.

Sales of PFY and PSF were good before National Day holiday and the inventory was revised down in end-September. Sales were modest during the holiday. Sales ratio of PFY was below 70% during the holiday. The inventory of polyester fibers was not high now. The inventory of POY and FDY was around 14 days and 15.3 days respectively, that of DTY was near 24.7 days in large companies and that of PSF was at 18.5 days.

In terms of cost, the polyester polymerization rate is expected to be revised up when demand turns better, the inventory is low and the profit is available, which is estimated to be around 92% in October (at 91.8% now). Therefore, supply and demand fundamental of PTA and MEG turns better, with inventory of these two both expected to reduce by 100kt in October. The processing spread will be adjusted but the absolute price is still anticipated to trace the trend on crude oil market. Spot RMB PTA and MEG rose to 5345yuan/mt and 4831yuan/mt after National Day holiday, and the polymerization cost increased to 6174yuan/mt.

The market fundamental of PFY favored its increment outpacing feedstock sector. Therefore, the nominal cash flow of PFY recovered and may improve further later.

As for price of fibers, escalated conflict in the Middle East during holiday further pushes up oil price. Price of polyester feedstock will trace the uptrend as the processing spread is not big. Sales of seasonal fabrics are anticipated to be intensive in October. The operating rate of DTY plants and fabric mills may remain high and even climb up. Rigid demand for PFY will keep good and speculative demand is expected to be stimulated by higher cost. Price of PFY is likely to increase more than feedstock market under low inventory, and the processing spread and cash flow is anticipated to recover further. If the effect of the Middle East event fades, oil price retreats and the polymerization cost traces the downtrend, PFY companies are likely to operate stably under low inventory, and the nominal processing spread and cash flow may be even better.