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Insight | Time: Feb 13 2020 9:22AM
Polyester market focus: production recovery of downstream market &demand tendency
 
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Affected by the epidemic, the restart of polyester units and downstream factories was delayed after the Lunar New Year holiday, and some companies were noticed to resume operation after Feb 10, but the restart was postponed again in some regions, waiting for the new policy.

Many local government successively released application policy for the restart of production from Feb 11, and polyester units and downstream factories needed to apply for the production restart at first. Companies had to sign letter of responsibility, and the risk for small fabric mills and twisting units was big. Thus, the companies that have applied for the production recovery were mainly leading companies. However, companies will face the problems like the timely return of workers and the transportation of materials after the application was successful. 

Companies should provide accommodation for workers and solve the transportation to guarantee the return of workers. Public transportation has been forbidden in some regions, affecting the return of workers.

The transportation of materials includes the production material on upstream market and the delivery of downstream goods, impacting the stocks and working capital in factories.

Most PFY companies have not resumed selling now, and almost all of the downstream companies were shut down. The recovery speed of downstream companies is supposed to be slow in the next 7-10 days.

Some leading downstream companies may restart operation successively but most will not run at full capacity. The periodically intensive production recovery will appear only after the epidemic is controlled well, which may emerge in Mar?

Current polyester polymerization rate is near 60% now, so the inventory pressure may be huge in later period. The recovery of downstream companies is expected to be 20-30 days slower than last year, and the feedstock prepared before the Lunar New Year holiday by the downstream plants was near 15 days, requiring to be consumed. If feedstock price declines and the epidemic is controlled, some downstream companies may replenish, which will be supportive to later demand.


Except for the recovery of production, the end-user demand tendency is another focus for market players. How about the orders of downstream companies now? The orders will affect the run rate of downstream market and polyester market after normal production resumed. If the epidemic is controlled effectively in Q1, the production of polyester companies and downstream enterprises and the consumption of end-users is supposed to be impacted. The polyester plants and downstream companies will gradually restart production after the epidemic ended, and the stimulus of orders in textile mills on demand for polyester should be concerned in the second quarter of 2020. The unsmooth sales of apparels in Q1 may drag down the future orders.

As for domestic demand, the spread of novel coronavirus not only affects the end-user demand in Q1, also likely to exert effect on the future demand. Fashion retail industry mainly represented by the apparels is greatly impacted by the seasonal change. From the angle of offline channel, the outbreak of epidemic impacted the sales of winter wear during the Lunar New Year season, and many branded spring wear has been on the market during the Spring Festival holiday. Feb and Mar are golden selling time for the spring wear, but customers decline substantially now, leading to accumulating stocks of spring apparels. Unsmooth sales of winter wear and spring wear resulted into greatly mounting stocks, having time cost and opportunity cost, reducing the cash turnover ratio, wasting labor force and materials and increasing the management cost. The inventory is expected to reduce cash flow, directly affecting the procurement and the benign circulation in the next quarter.

Apparel companies are supposed to prepare for the production of summer wear in Feb-Mar. The problems of production restart resulted into the delay of production and delivery of the summer orders, and the stagnated sales of winter and spring wear led to the shortage of cash flow in apparel manufacturers and dealers, which will cause the reduction of production and orders volume for the summer wear after the normal production resumed. Under such circumstance, the order-taking in upstream fabric mills is anticipated to be dragged down.

The spread of novel coronavirus covered nationwide, with wider coverage compared with that during SARS in 2003, and the influence on the demand outweighed that during SARS in short run. Besides, recovery of demand in later period may take longer time than that during SARS as overall economy faces downward pressure and the demand is growing under low growth rate. The inventory of the whole industrial chain needs time to digest. However, the online shopping has been very mature now, and many apparel companies have started developing online selling. The recovery of online sales are anticipated to offset a portion of negative effect.


In view of the export, the epidemic affects the delivery of export orders, and some overseas orders are transferred to other markets, while the scale may be small. SARS exerted small effect on the exports of textiles and apparels at that time. The delivery of export orders for apparels will be solved if companies ramp up run rate after the epidemic was controlled, and the orders that are impacted are very limited. The major focus for exporters is the movement of Sino-US trade conflict. The first stage agreement has been made, and the additional tariff for Chinese goods worthy $300 billion was cut to 7.5% from 15%, and eyes are suggested to whether the tariff will be removed further.
[RISK DISCLAIMER] All opinions, news, analysis, prices or other information contained on this report is provided by analyst of Zhejiang Huarui Information Consulting Co., Ltd (CCFGroup) as general market commentary and does not constitute investment advice. CCFGroup will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
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