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Insight | Time: May 29 2020 3:53PM
Polyester market embraces the best time year to date
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Since April, with the control of the COVID-19 pandemic in local China and gradually eased restriction in some overseas countries, the local and export orders on downstream market have improved weakly on the month. The weak improvement is believed to be seen by many people, but it is worth noting that domestic sales in May are diversified. For example, some domestic products that improved for a short term in April, including silk-like fabrics and some woven and knitted goods, declined in May, which was mainly due to the following 2 reasons: firstly, May-Jul are the traditional off-season for domestic sales; secondly, although the pandemic is under control overall, it still has a far-reaching impact on the consumption. The demand improves for a short term but lacks strong durability later.

After continuous bottom-fishing replenishment from April to May, current downstream players witnessed high stocks of finished goods and feedstock, but some downstream enterprises and traders are still willing to continue to restock under low price, especially in companies that see relatively low inventory of finished goods and feedstock. That means that they are still willing to replenish after price dipped. The reason why the downstream players have high stocks of finished goods and feedstock this year is that the absolute price is low, expecting a small risk to hoard up some cargos. In addition, bank loans are relatively loose and the interest rate is relatively low this year, providing financial support to many downstream participants.

It can be seen from the sales ratio in polyester companies. If polyester enterprises discounted for promotion and the feedstock price was strong at the same time, sales ratio surged periodically. As for how long can the replenishment last? For the companies that see high stocks of finished goods and feedstock may replenish limitedly later restricted by warehouse and capital and risk-aversion awareness, more likely to restock based on the digestion of stocks at hand. However, for the companies who do not have high inventory, they are likely to continue purchasing under low price in expectation of slightly rising feedstock price in later period and warmer demand in Q3.

For the peak season of September-October in the second half of the year, most of the downstream players have certain expectations, which is one of the reasons that support them to maintain high inventory, but as to how good demand can be, many players still have some concerns. The first is the uncertainty of the COVID-19 worldwide, and the second is the concern about the impact of the epidemic on consumption. Taking China as an example, even though the pandemic has been basically controlled in April, the sales of textile and apparel still showed a negative growth of 18% year-on-year. There has not been a significant increase in supplementary growth with eased pandemic. Instead, consumers become more cautious in purchasing textile and apparel because of the decline in revenue. This is the case in China, not to mention the overseas market. Another concern is that the current stocks of finished goods and raw material is very high in downstream market. Even if demand rises, it will be difficult to digest the inventory produced in the first half of this year only by sales improvement from September to October. The contradiction is hard to be solved. Downstream players with high inventory may rush to sell at low prices during the peak season. Price of grey fabric may be difficult to rise, but the so-called peak season demand is likely to be only a flash in the pan. June-July is the traditional slack season, and players are expected to focus on making samples.

Polyester companies should witness the best period year to date when all indicators have performed well overall now: cash flow changed from negative territory to positive territory, stocks declined to rational level from high, and the run rate remained high. The inventory of leading polyester enterprises has dropped from the original high of 40-50 days to 20 days around, and the inventory burden has obviously eased. We do not worry the reduction of polyester polymerization rate in Jun temporarily as some downstream players need to replenish under low price and it will take time to see mounting stocks in polyester enterprises. In addition, polyester companies may not cut run rate rapidly in short run, not pessimistic about the short-term status, while most worry about the medium-to-long term market. The average polyester polymerization rate is temporarily estimated to maintain 89% in Jun and may even approach 90%. But concerns are held toward the situation in Q3. Currently, downstream speculative demand has far exceeded the real demand, and the downstream players are still continuing to make inventory. Even if the demand meets expectations in the third quarter, it is a period of inventory digestion, which may exert limited effect on the polyester run rate raise. If it is not as expected, then whether will the contradiction of high inventory break out in advance, then conversely meaning that the highest polyester polymerization rate will be around June?
[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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