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Insight | Time: Jul 23 2020 3:35PM
Reasons why yarn prices all hit new low
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Downstream demand of yarn market has been sluggish since the pandemic relapses this year. Entering the dull season of Jul, yarn mills have reported worse sales and accumulated inventory. Recently, with raw materials weakening, prices of cotton yarn, rayon yarn and polyester yarn all decline and hit new low.

In Q2, cotton yarn price moved down to 18,560yuan/mt now from 19,320yuan/mt in early Apr with a decrease of 760yuan/mt; rayon yarn declined to 11,950yuan/mt from 13,350yuan/mt with a decrease of 1,400yuan/mt; polyester yarn slid to 9,350yuan/mt from 10,000yuan/mt with a decrease of 650yuan/mt. why do they all step downward and how will they perform under the pandemic?

1. Weakening raw materials reduce the cost support of yarn prices.
Prices of cotton, VSF and direct-spun PSF were all lower than those in the same period last year. During recent months, cotton price moved down to the lowest in Mar and then recovered somewhat, but it still fluctuated at a low level. VSF price kept dipping and the sales remained bleak. Direct-spun PSF, which had once surged alongside ES fiber in Apr and the rise of crude oil in May, softened recently and started continual fall with lack of demand. Overall weakness of raw materials eroded the cost support to yarn prices.

2. Yarn mills undersell amid inventory accumulation.
Since the first half year, the inventory of cotton yarn, rayon yarn and polyester yarn also showed uptrend. Cotton yarn mills cut run rate and saw rising inventory. As for rayon yarn, the inventory reached historical high and many mills chose to sell off, but the sales ratio still cannot reach 100%. Polyester yarn also witnessed heavier inventory pressure in Jul after underselling in May and continuous fall of PSF price also dragged down polyester yarn price, but the sales ratio kept bearish and many mills in Shandong and Hebei started to cut or suspend production burdened by high inventory.

Amid low prices of raw materials, high inventory and sluggish downstream demand in dull season, prices of cotton yarn, rayon yarn and polyester yarn showed downtrend. Coupled with the pandemic, yarn mills suffered a lot and many of them undersold due to negative cash flow and tight capital.

Looking from the profits, all of the three spun yarns have been trapped into losses to different extent since Apr.

The expansion of losses in cotton yarn resulted from volatile downward price; rayon yarn price stayed low all the time and suffered serious losses, but it showed no signs of improvement coupled with dull season coming; the losses of polyester yarn reduced in May as crude oil and its raw materials strengthened, but later on the losses enlarged along with weakening raw materials.

In conclusion, considering no favorable news from raw materials side, it is suggested to pay attention to the pandemic, production cuts of OPEC countries and the change in international relations. On the other hand, downstream demand has not shown signs of improvement, lending no support to yarns to move up, so yarn prices are predicted to move down further, but the decrease will be limited, so downstream plants are suggested to restock moderately.
[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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