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Insight | Time: Apr 21 2020 10:04AM
Oil market collapses, polyester industry should be alert
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U.S. oil prices crashed to the negative territory for the first time in history on Monday, fueled by pandemic-related demand shock and oversupply fears. The West Texas Intermediate (WTI) for May delivery shed 55.9 U.S. dollars, or over 305 percent, to settle at -37.63 dollars a barrel on the New York Mercantile Exchange, implying that producers would pay buyers to take oil off their hands. It marked the first time an oil futures contract has traded negative in history, according to Dow Jones Market Data. WTI crude oil futures prices plummeted because traders were forced to close long positions to avoid buying physical crude without storage capacity. Increasing pressure has caused crude oil to plunge to a negative value in recent months, and the polyester industry also witnessed high inventory burden.

Based on the Customs statistics, exports of textiles and apparels in China decreased by 20% y-o-y in Jan-Feb, 2020, with the y-o-y decrement up by 8% compared with the same period of last year (exports of textiles and apparels in Jan-Feb, 2019 fell by 12% on the year), which was mainly attributed to the Sino-US trade conflict and the COVID-19 outbreak. Some foreign orders were canceled or delayed amid the pandemic in Mar, while Mar was supposed to be see greatly recovering export by convention. Exports of textiles and apparels kept falling substantially in Mar, and the y-o-y decrement in the first quarter of 2020 was at 20%.

The spread of pandemic intensified worldwide since Apr. EU and U.S. were major traditional export destinations for Chinese textiles and apparels, occupying around 34% of the total. Europe and U.S. were seriously hit by the COVID-19 pandemic now, and many nations carried out blockade measures and the outdoor activity of the residents were constrained, leading to standstill consumption, similar to the situation in China in Feb. The dramatic reduction of demand for textiles and apparels in EU and U.S. greatly impacted the exports of textiles and apparels in China. The exports of textiles and apparels in China is still expected to witness big negative growth in the second quarter of 2020, especially in Apr-May. 

Chinese textiles and apparels industry has high export dependency, with proportion of export at above 40%. Therefore, the outbreak of pandemic worldwide exerted huge influence on the textile and apparel industry. Many export orders were canceled. The operating rate of fabric mills started decreasing from late-Mar for the second time, and massive plants shut down for holiday during the Tomb-sweeping Festival (Apr 4-6). Although the run rate of downstream companies rose after holiday, it remained at 50-60% and may reduce further in end-Apr with the coming of the May Day holiday (May 1-5).

The operation rate of downstream and upstream market diversified this year, which seemed to be irrational. Capacity expansion peaked this year in polyester market and upstream market, while end-user demand substantially shrank on the COVID-19 outbreak. Stocks of polyester market and upstream feedstock market bound to accumulate substantially. However, supply shrinkage of upstream market was not apparent although end-user demand dramatically decreased and the run rate of fabric mills substantially declined, which resulted into rapidly mounting stocks of the whole polyester industry chain. The operating rate of polyester market stabled edged up, that of PTA was rising, that of PX was not low, and that of MEG dipped greatly. But stocks of MEG kept mounting as Zhejiang Petrochemical and Hengli Refinery started operation at the beginning of 2020. By the end of Apr, the stocks of PTA amounted to 4 million tons and those of MEG was near 3 million tons.

All in all, textile and apparel industry in China presents high export dependency, and EU and U.S., which are major destinations for Chinese textiles and apparels, witnessed serious pandemic temporarily; therefore, exports of textile and apparel were dragged down, further weighed on the demand for textiles and apparels and the run rate of downstream fabric manufacturing, printing and dyeing and apparel industry. With low oil price, the upstream basic feedstock market ran at high capacity in China, ending up with excessive capacity and production, and the actual inventory kept refreshing new high although some stocks were transferred to other links of the industry driven by speculative procurement. The delivery risk of the WTI May contract has a good lesson for the delivery of liquefied commodities with high inventory. Although high-stock PTA is not a liquefied commodity, the delivery risk of May contract seems to be basically resolved from the current position of 260,000 lots, which is still not sure. Even if it is resolved but the pandemic continues into Q3, the expected replenishment does not appear in Q3 and the Sep warehouse receipt cannot be carried over, then the delivery risk of Sep contract will be greatly increased.
[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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