China’s Polyester Market Under Pressure Amid Tumbling Oil Price

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In China’s domestic market, retail sales of apparels are substantially impacted by the COVID-19 outbreak, leading to piling up stocks in apparel enterprises. Apparel makers are stuck with winterwear inventory, even as sales of spring clothes were stunted.

Apparel exports have been impacted too due to delays in fulfilling export orders, due to the lockdown in China. Some export orders were transferred to Southeast Asia. Moreover, demand also diminished in some nations on COVID-19 outbreak, so overseas buyers slashed the volume of orders or canceled orders too. Based on China’s customs statistics, exports of textiles, yarns, fabric and made-ups was around USD$ 13.7725 billion in Jan-Feb, 2020, down by 19.9% on the year, and that of apparels and accessories amounted to US$ 16.0623 billion, down by 20% compared with the same period of last year.

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Polyester industry faces high inventory burden

Even after the delayed resumption of businesses and factories, the recovery was slow due to lack of workers and orders. The stocks of finished goods in polyester companies were devaluated after downstream plants delayed resumption, and the inventory of PFY touched historic high, mainly in leading polyester enterprises. Production cuts became the norm.

Polymerization rates fell to below 62% in January and February, and is expected to be around 78-80% in March. Polyester production slipped by 1,060kt in February, and the decrement in March and Q1 may be at 500kt and 1,560kt respectively. The growth rate of polyester output is adjusted down to -6.9% in Q1 2020 from the pre-holiday estimate at 6.6%.

Collapsing crude oil doesn’t help

Overseas stock market collapsed, and the OPEC+ failed to reach an output cut deal. Price of international oil plunged, with WTI crude oil price down to $30/bbl, and the whole world was in panic. Price of WTI crude oil and PFY hit historic low twice since the financial crisis in 2008: in early-2009 and early-2016.

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WTI closed at $26/bbl at the beginning of 2016, touching bottom, and the average trading price of POY150D/48F was at 5,900yuan/mt on that day.

If taking the oil price in 2016 as a reference, price of POY150D/48F is likely to be lower than 6,000yuan/mt again in the future, but the actual situation was different from 2016. Many sectors of polyester industry chain were not in surplus in 2016, and the processing fee of PTA/PX/MEG remained sound.

However, current polyester feedstock market encountered pressure on excessive supply, and the processing fee has been narrowed.

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However, current industrial concentration ratio of PFY market is far higher than that in 2016, and leading polyester enterprises enjoy heightening voice in pricing. Thus, price of POY150D/48F is expected to be supported at 5,500yuan/mt or above. The stocks of finished goods in PFY companies have been greatly devaluated.

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