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Insight | Time: Jul 30 2019 10:21AM
Polyester short-term demand to be restricted by end-user inventory
 
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In Jul, restricted by muted end-user demand, operating rate of downstream twisting units, fabric manufacturing plants and the overall polyester market declines, and price of polyester products and PTA also heads south.


Weakening industrial chain begins from end-user market this time, and the rebounding also requires the improvement of end-user demand. Many market players expect demand in Aug will fare like that in Jun. Let’s make a brief comparison between current end-user fundamentals and the situation in end-May.

Absolute run rate has been lower than that in end-May
Operating rate of downstream polyester yarn, twisting units and fabric manufacturing plants has declined since Jul, especially O/R of twisting units and fabric manufacturing plants which has slipped by 23% and 22% compared with high level. The absolute low level has been lower than that in end-May. The reduction of run rate of warp knitting plants in Changshu and Haining is particularly apparent.

O/R change of end-user market in Jul (%)
  Polyester yarn Twisting units in Zhejiang and Jiangsu Fabric manufacturing plants in Zhejiang and Jiangsu  Fabric manufacturing plants in Fujian and Guangdong
Low in end-May 78.5 71 65 43
28-Jun 76.8 89 79 43
26-Jul 71.5 66 57 40
Change in Jul -5.3 -23 -22 -3
Change on low level in end-May -7 -5 -8 -3


Price has not breached earlier low, but cash flow has been lower than previous low

Recent lowest price and earlier level (end-May/early-Jun) (Unit: yuan/mt)
Date PTA MEG PET bottle chip PET fiber chip POY150D FDY150D DTY150D PSF
Recent lowest price 5470 4410 7010 6800 7815 7650 9050 7345
Lowest price in end-May/early-Jun 5435 4275 6975 6500 7380 7600 8925 7190
Change 35 135 35 300 435 50 125 155

As for absolute price, price of some polyester products like PET bottle chip and FDY has touched the lowest level in end-May and early-Jun, while that of many descriptions such as PET fiber chip and POY is still higher than previous low.

Recent lowest cash flow and previous level (end-May/early-Jun) (Unit: yuan/mt)
Date PTA (spread-700) MEG PET bottle chip PET fiber chip POY150D FDY150D DTY150D PSF
Lowest level since late-Jul 446 -312 -81 -131 159 -396 -130 144
Lowest price in end-May/early-Jun 256 -1232 9 -41 -31 -216 175 101
Change 190 920 -90 -90 190 -180 -305 43

In view of the cash flow comparison, cash flow of many descriptions has been lower than that in end-May and early-Jun, especially FDY and DTY, and losses of PET bottle chip were also lower than those in end-May and early-Jun.

Fabric manufacturing units and beverage plants do not show higher buying interest even when feedstock market is not profitable, which is mainly based on the following 2 reasons: 1. Holding bearish view toward upstream market. 2. Feedstock or finished goods inventory pressure restricts demand.

The first contradiction is easy to be solved. Upstream market can surrender some profit to stimulate demand, for example, to narrow cash flow on PTA and POY sector.

The second question is key now. Earlier stocks will lower only after peak-season really comes, and end-user demand is supposed to improve after less liquidity is occupied by inventory.


Compared with late-May, current feedstock inventory of end-users is also low (comprehensively below 7 days), but socks of finished goods are higher than the lowest point in late-May, especially inventory in Wujiang, Changshu and Haining.


Different plants witness various performances, and some plants still possess capability to have bottom-fishing. Price level is crucial. But high stocks present stronger suppression on bargain-hunting demand compared with late-May and end-Jun.

Feedstock inventory of downstream plants has been slanting low now, requiring to restock, but inventory of finished goods is high. Impulse-type bottom-fishing sales ratio may appear on PFY market, but the strength is supposed to dwindle. Sales ratio of PFY improved greatly on last Friday, but has reduced from last Saturday.

Many downstream players witness the worst business in Jul since the Spring Festival holiday, and the business is likely to improve in Aug-Sep, but the improvement is expected to be limited, which cannot be described as peak season. However, the business in Aug-Sep is anticipated to be better than that in Jun-Jul. Downstream plants are likely to try their best to lower stocks and run rate in Aug-Sep, holding pessimistic view toward demand in the fourth quarter. Besides, the cost side may decline, not ruling out price of PFY hitting yearly low at an indefinite future period.

Besides, profit of grey fabric is lingering around or below the cost line now, which is mainly because of higher finished goods stocks resulting from feeble demand and excessive capacity. Downstream plants will be cautious in chasing up and are more likely to restock intensively when price is low, so sound sales ratio of PFY will be hard to have continuity. With narrower cash flow and frequent inventory pressure, the polyester polymerization rate is expected to move lower in the second half of 2019 compared with the first half of year.
[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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