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Insight | Time: Jun 23 2022 10:32AM  Editor:Monica Jiang
Facing plight and moving forward by VSF-demand contraction
 
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China's economic development is facing triple pressure of demand contraction, supply shock, and weakening expectation鈥攂y Premier Li Keqiang at the Fifth Session of the National People's Congress on Mar 5, 2022.

 

Premier Li summed up the current pressure on economic development and accurately predicted the current situation of the manufacturing industry, which is also the status quo of VSF industry. When we review the market changes in the first five months of 2022, the core elements basically rely on the three points.


Demand in China local market

Last week, the National Bureau of Statistics (NBS) released retail sales of consumer goods in the first five months of 2022. The total consumption of apparels in Jan-May fell by 8.1% year-on-year, of which the year-on-year decline in May was as high as 16.2%. At the same time, although the price of apparels increased slightly, according to the consumer price index of the NBS, the price of apparels still rose by 0.5%. Disregarding the price, apparel consumption in Jan-May contracted by about 8.7%.


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It is well known that apparel as the main application of VSF takes up about 86% of the share. Considering that there is a long industrial chain from fiber to apparel, producers for each link are willing to maintain higher operating rate and bear certain inventory, but it may still cause more than 5% of the demand loss for VSF downstream products.


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It can be seen that the monthly operating rate of rayon yarn in Jan-May this year is much lower than the comparable 2021 level. Considering capacity growth of rayon yarn, the actual consumption of VSF is slightly more than the data above.

 

Although the consumption of VSF decreased year-on-year, the demand for VSF was relatively better in the first five months of 2022 because spinners spurred by expectation for inflation hoarded up stocks of VSF in addition to normal consumption. The feedstock logical inventory of spinners was still around 18 days at the end of 2021, but had risen by 38 days to 56 days by mid-Jun, which is equivalent to an increase of 21% in demand on the basis of normal consumption.

 

Therefore, the logical inventory of has been in negative territory when the physical inventory kept falling in the first five months, but it is noteworthy that the demand of Jan-May was fulling forward the demand of more than one month afterwards, actually releasing the consumption for more than six months. Once the expectations change, the market may be at a stalemate for some time.

 

Demand outside China

Demand outside China performs better. On the one hand, part of demand has transferred to other fibers due to higher cotton price in international market. On the other hand, some of orders for Chinese textiles and apparels show signs of transferring to South Asia and Southeast Asia with rising prices of international energy and resources. However, those countries lack sufficient supply of raw materials and the demand for China鈥檚 VSF is also increasing.

 

In the first five months of 2022, VSF export of Chinese mainland totals 152.3kt, a year-on-year increase of 3.2%.

 

As the upper link of the industry chain, VSF benefiting from rising resources witnesses tolerable demand in China local market and better demand outside China in the first five months of 2022, but the demand for downstream sector of the industry has decreased much. In the long run, once the expectations change, there will be uncertainty in the demand.


Facing plight and moving forward by VSF-supply shock

Facing plight and moving forward by VSF-weakening expectation

[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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