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Insight | Time: Sep 22 2022 2:51PM  Editor:Louis
Will the improvement in spandex fundamentals sustain?
 
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In early and mid Sep, BDO prices in the industry chain bottomed out and rebounded sharply. Downstream buyers anticipated that PTMEG and spandex prices had reached the bottom and there would seasonal demand to support the prices. Buyers for spandex purchased 1-5 days of spandex earlier but now has increased the purchase to 5-20 days, and some traders purchased large amount. The supply and demand fundamentals of spandex improve, with mainstream prices stabilizing and prices of some sources moving up. Then, will the stabilizing price and the sporadic rebound be short-lived or can the trend sustain? Let鈥檚 have a glance at the fundamentals.

 

1. BDO supply

The losses earlier led to low operating rate of BDO plants, while downstream demand recovered with activities of buying to cover requirements as well as restocking increasing. However, with the pandemic resurged in Xinjiang, delivery of goods was impacted, exacerbating the tight supply. As a result, BDO price has rebounded from 10,000yuan/mt to 14,200yuan/mt, up 42% since Sep, an increase much bigger than that in most commodity futures.

 

Looking forward, BDO supply is expected to increase obviously, and the price would be weighed heavily, as plants are expected to restart with the end of maintenance season and new capacity would materialize production. The sharp rally in BDO price could be short-lived, and the medium and long term trend would be dependent on the fundamentals.


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2. Spandex supply

In Jul-Aug, weak demand from textile and apparel was fed through to spandex and upstream sector, leading to a slump in BDO and PTMEG prices and sharp devaluation of spandex inventory. Spandex plant operating rate declined to record low, averaging 69.6% and 51.7% in Jul and Aug respectively.

 

In early and mid-Sep, however, with spandex profits recovering and supply of some varieties tightening, spandex plant operating rate rose to around 70%, up 20 percentage points from the low point. In Sep-Dec, spandex capacity is expected to expand heavily, with 150kt/yr new capacity to get on stream. Though some new capacity may be delayed due to slow consumption, suppliers would keep selling actively as supply would be more than what can be consumed.


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3. Demand

Growth of demand for textile and apparel is anemic, due to high inflation and spread of pandemic globally. Increase in the foreign trade orders for China鈥檚 textile and apparel exports is limited, and though China domestic orders improve, producers adopt make-to-order approach. Fabric mills remain cautious in building stocks as sales of textile and apparel are weak.

 

Although operating rate of fabric mills rebounded notably in late Aug or early Sep, whether it could sustain remained to be seen, as end-use demand for apparel does not pick up. Sales of apparel, hat, shoes and knitted textile products from companies above designated size record negative growth in 2022. In Jan-Aug, the sales declined by 4.4% from the same period of last year, indicating that there鈥檚 no sign of recovery on demand side. In addition, due to the pandemic breaking out in several regions, it is difficult for residents鈥 income to increase while unemployment rate sustains high and consumer confidence is slack. It becomes tougher for apparel stores, especially for some brand clothing stores which operate with surprisingly high stocks. Overseas orders are also thin, not only to China鈥檚 textile and apparel sectors but also to some regions of Southeast Asia. Estimated based on the orders, Vietnam鈥檚 export growth could continue slipping in Sep-Oct.


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Spandex gets support from sharp rebound in upstream BDO caused by tight supply combined with seasonal demand. However, in the backdrop of economic growth slowdown, global interest rate hike expectation, as well as weak consumption, spandex plants in China are cautious in raising spandex prices. Some foreign-invested plant raise the price by 1,000yuan/mt tentatively, but most plants are focused on maintaining customer relation with stable sales amid the fast-pace capacity expansion cycle, and transferring inventory from supplier warehouse to downstream segments.

 

In addition, the rebound in BDO is not solid, and its supply is expected to increase. Spandex supply is also anticipated to rise while demand may weaken marginally in Nov, hence spandex plants are cautious and keep active selling. Spandex price is expected to stay strong till end-Sep or Oct, but then, it may fluctuate with weakening demand and rising supply amid competition among suppliers.


[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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