Polyester filament to witness apparently recovering profit in Q4 amid improving fundamentals

The fixed-price sales policy that began at the end of May resulted in remarkable performance for the industry in June. However, the excessively high inventory accumulated by leading companies during the price stabilization process has laid a significant hidden danger for future inventory devaluation. Although processing fees remained stable in Q3, the substantial devaluation of inventory dragged down overall efficiency.

According to data estimate from CCFGroup s, the price of polyester filament fell by 1,200yuan/mt in Q3, reaching a low point not seen since the fourth quarter of 2022, which dealt a heavy blow to the Q3 profitability of polyester filament. The sharp decline in polyester filament prices was attributed to the collapse in costs and weakening demand.

On the cost side, crude oil transactions saw OPEC+ resume production and demand weaken, with WTI prices falling from 84.52 in early-July to 65.27 in early-September, a decline of 23%, equivalent to an 800yuan/mt decrease in PTA costs. Meanwhile, the supply and demand for PX weakened, leading to PXN processing fees dropping from US$328/mt in early-July to $168/mt in early-September, a decrease of US$160/mt, which also corresponded to an 800yuan/mt of decrease in PTA costs. This round of PTA prices reduction of 1,500yuan was due to declining oil price and the narrowing of PXN processing spread.

On the demand side, the traditional off-season from July to August, combined with persistently high temperatures and the downstream precautionary measures taken in response to continuous raw material price declines, resulted in a higher-than-expected shutdown rate. Downstream fabric mills' operation ratedropped by 18 percentage points, reaching a relatively low level compared to recent years.

If the loss of profitability in the polyester filament industry from March to May was mainly due to price discipline issues, then Q3's loss was primarily due to a substantial devaluation of inventory. However, profitability in Q4 is expected to recover significantly on a quarter-on-quarter basis.

By the end of September, driven by seasonal demand during the peak season (with a seasonal increase in terminal orders and downstream operating rate returning to a high level), along with a rebound in crude oil prices and favorable macroeconomic policies, sales ratio continued increasing. The inventory of polyester filament companies fell to its lowest level since the beginning of the year, with some tight specifications sold out, leading to a rapid price increase of 500-600yuan/mt during the National Day holiday.

Given the significant alleviation of inventory pressure (with filament inventory now at a relatively low level for the year) and the temporary support of peak season demand, it is expected that the polyester filament market will perform better than raw materials in the first half of Q4. Processing spread should remain stable. Based on the processing spread trends since Q3, industry profitability per ton has stabilized between 100 and 300yuan/mt, with leading companies at around 100-150yuan/mt. Overall, Q4 profitability is expected to improve significantly on a quarter-on-quarter basis. Even in the worst-case scenario of another substantial drop in oil prices, the devaluation of filament inventory is not expected to exceed Q3 levels, due to the following reasons: 1) PX processing spread has been compressed to a low level around 200yuan, and 2) demand enjoys a certain level of support, and the inventory is not high.

The growth rate of filament capacity is expected to be below 2% throughout 2024. The ongoing high operating rate, especially during the Spring Festival holiday in Q1, resulted into surging production. The production of polyester filament yarn is anticipated to increase by near 8-9% throughout 2024, while the growth rate of demand for textiles and apparels may be near 5-6% (export at 10% based on quantity, domestic demand grows little). It is the major reason that filament yarn companies are bothered by inventory for long this year. However, the increase in fabric manufacturing and DTY sector is big too, with growth rate at 7-8 percentage points. Thus, downstream sector can bear partial inventory in filament yarn plants. The operating rate of polyester filament yarn plants during the 2025 Spring Festival holiday should be concerned.

The growth rate of polyester filament yarn capacity may increase to 4% in 2025 but that of production is expected to reduce (the average operating rate of 2024 has been high in history) by 4 percentage points. As long as the growth rate of textile and apparel exports does not decrease obviously (Sino-US trade barrier should be highly noted), after policies being released successively in local China, domestic demand is anticipated to gradually improve. Supply and demand is still likely to keep turning better on filament yarn market.