Dec is traditionally slack season of textile industry. In the same period of previous years, the market started to head north underpinned by expectation of peak season, but the price generally increased slightly.
|VSF price trend of China (unit: yuan/mt)
||Fall after hiking
||Dip after rebounding
It is rather different in Dec, 2016. During the weekend of Dec 17-18, VSF price jumped 600yuan/mt as medium-grade VSF was quoted up to 16,000yuan/mt from 15,400yuan/mt. By Dec 19 when the market opened, VSF price had gained 1,000yuan/mt or 6.67% from 15,000yuan/mt at the beginning of Dec.
The weekly increment of 500yuan/mt is nothing new to VSF, but such jump in the early stage was rarely seen. Let us see the driving forces.
First is supply and demand. Now potential supply consists of existing inventory, daily output and future production.
1. Inventory of VSF plants has been low for most of the time this year, which remains low at 8 days currently. This figure indicates actual stocks, but some of which are already ordered to be delivered. From this perspective, the available supply is limited.
2. VSF plants expect to raise operating rates boosted by high profits, but some units fail to run at full capacity restrained by environmental issue recently. Since the beginning of Nov, the operating rate of VSF plants is unable to recover to the level of Oct, especially under the circumstance of heavy smog hitting North China. Therefore, some VSF plants have cut operating rates and a few ones are even requested to be closed. The reduction of run rate has led to decreasing daily output by around 9%.
3. VSF facility has to run continuously, so producers will not suspend operation during Lunar New Year holiday. However, spinners will generally set for holiday, so VSF plants will mostly sell part of fibers in advance. According to sample survey, the pre-sale volume of VSF plants is equivalent to the level of 20-40 days’ output, except for a few ones who are forbidden to sell products in advance.
The above three parts constitute potential supply, which is unequal to supply and how much will be launched on the market is crucial. VSF plants were eager to sell products in advance previously and most of them were inclined to accomplish sales target of more than 5-day output in one day. Given huge pre-sale volume starting from last weekend, the final supply will be just equivalent to daily output without further increasing pre-sale volume. Based on such model, the actual supply to buyers is assessed to reduce by 80%, though the figure is unbelievable.
Now the demand mainly comprises production demand and speculative demand. Although rayon yarn market presets tolerable with rising proportion in spinners lately, end-user market does not improve much and operating rate of spinners changes little, so there is no significant growth of production demand.
The latest round of VSF price increase is mainly spurred by speculative demand. It is easy to find out through the following chart why the demand is rising sharply recently. In the recent two months, the price of major chemical fibers has improved much, except that of VSF. Even cotton that is relatively mild has been higher than the level of Nov. However, VSF market has been lingering at low level during the period.
*Note: vertical ordinate=daily price/the price on Nov 1st.
In the past two years, VSF is easier to rebound when it is lower than cotton. There is historical background of falling VSF price before, but we are still unsuspicious of the rationality and necessity of keeping low level from Nov to early Dec.
Coupled with improving downstream market and rising commodity market, it is rational to see increasing speculative demand of VSF. Under the circumstance of capital leverage in outside market, speculative sentiment and power has enhanced immediately and capital leverage on the market is roughly estimated to be more than 2 billion yuan. In the recent week, some spinners intended to build up stocks for more than one-month consumption, with some higher at one-quarter level, thus the actual demand released in the past week was more than four times of normal consumption.
VSF plants plan to reduce pre-sale volume, with supply getting close to daily output while purchasing volume is several times of consumption on soaring speculative demand, leading to extreme imbalance between supply and demand in the short term.
VSF price is relatively low compared with other products and producers are not selling fibers on large quantity in face of strong demand. Therefore, price increase and unwillingness of selling fibers are not only subjective speculation, but also defense strategy from the objective angle. Of course, some producers who adjust up offers may have other strategic plans.
VSF market participants have witnessed great ups and downs for several times, including the last wave of diving to 16,000yuan/mt from more than 30,000yuan/mt. The speculation in some links of the industry chain can certainly bring considerable profits without stimulating end-user market, but it will have heavy strike on the industry as well. Moreover, bigger volatility requires longer recovery in the future.