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Insight | Time: Jun 27 2019 9:27AM
Spandex market review on Q2 and outlook for Q3
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Spandex market was relatively weak in the second quarter, dragged down by weak demand. Finished goods inventory of downstream weaving plants was high, while weaving plants had insufficient new orders for fabrics with spandex, so they produced cautiously. Spandex sales significantly slowed down, and market prices, operating rate and cash flow of spandex all gradually fell from high. Besides, inventory of spandex plants obviously ticked up. In the third quarter, many newly added capacities are expected to be released, so how will spandex market fare?

Prices declined
In the second quarter, spandex prices decreased endlessly. Prices of Spandex 20-40D decreased by around 2,000yuan/mt. Traditional peak season of demand for spandex 40D was in July-September. Demand was relatively weak in the first half of this year, while newly added capacity of Xinxiang Chemical Fiber with high efficiency and low cost mainly produced 35D and 40D, which intensified the competition.
Date 20D 30D 40D
2019-4-1 37,500 36,500 31,900
2019-6-25 35,800 34,800 29,800
Change (yuan/mt) -1,700 -1,700 -2,100
Change (%) -4.50% -4.70% -6.60%

The decrease in 40D price was the largest in the second quarter. Supported by the demand from light and thin fabrics, the decline in 20D and 30D prices was modestly smaller than that of 40D.

Profit turned to loss
Affected by thin downstream market in the second quarter of this year, demand gap significantly widened. For grabbing market, spandex plants provided discounts, leading to a new low of spandex 40D cash flow. However, partial spandex plants with capital, technology and cost advantage could still keep profitable, while some old units were under great losses pressure.

Operating rate kept at a high level
Average operating rate of spandex industry was at around 89%. Thanks to the support of good start of spandex market after the Spring Festival, spandex plants were under moderate inventory pressure in the second quarter. Units that shut down at the end of the fourth quarter of 2018 and the first quarter of 2019 restarted, and run rate of spandex industry was at above 90% in April. However, under inventory and cost pressure, more spandex plants cut output in May-June, and operating rate slipped to around 80% in late June.

Meanwhile, there are a lot of new spandex capacities. In the first half of this year, 12kt/year spandex unit and 30kt/year spandex unit were added to LDZ and Xinxiang Chemical Fiber respectively. LDZ’s newly added unit basically reached designated capacity in the second quarter, while Xinxiang Chemical Fiber’s 30kt/year unit almost ran at full capacity. At the end of June, capacity of spandex industry reached 823kt/year.

Inventory sharply ticked up
Some circular knitting machines were idled for long time due to poor orders. Operating rate of covered yarn machines, warp knitting machines and lace machines was lower than the same period of last year. The traditional off-season of downstream weavers’ demand for spandex extended, so midstream and downstream largely reduced spandex inventory in April-May. Spandex was purchased largely for rigid demand in June. In the second quarter, inventory of spandex plants was accumulated, which rose by around half a month compared with the end of the first quarter of 2019.

Market outlook for the third quarter
The Sino-US trade issues is one of the most important factor affecting commodities and mentality of market players. The imbalance between spandex supply and demand is likely to still exist in the third quarter, and demand may touch the bottom after the shrinkage in the second quarter, but may not improve greatly in the traditional off-season. Nevertheless, production will remain high as Xinxiang Chemical Fiber may put a new line with capacity of 15kt/year into production and Chongqing Huafon’s 30kt/year unit is scheduled to start production in the third quarter.

Price competition will become severer as leading spandex enterprises expand capacity ambitiously. Old Units will suffer larger losses facing inventory and capital pressure, so the reshuffle of industry will acceleratee. More old units in the central and the east are anticipated to shut down or cut output, and prices may largely be weak.
[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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