- Record VSF sales volumes in FY 20A (554kt/+2.4%
y/y): Jan-Feb saw record production rates of 1,700/t (usually 1,400-1,500/t) driven
by ”booming” demand, with a continued shift to VSF. Q4 volumes were flat as national
lockdown (10 days in March) saw March volumes down 18% (lost 22kt). Global
caustic soda prices weakened further (supportive of Paper & Packaging
margins), impacted by industry demand, imports and ramping up of new
capacities.
- COVID-19
to flush out smaller VSF players in China: There are currently c.25 VSF producers in China. China
VSF price is currently c. RMB 9,000/t – most players are making a loss of
RMB 2,000/t. China average utilisation has dropped to 60% (from 66-70%). During
the China lockdown, VSF mills continued operating, and built up massive
inventories as downstream had not picked up. Spinning operations remain below
50% utilisation. - Grasim
thinks VSF prices have bottomed and hovering around variable cost of production:
“Price right now is
irrelevant”, with no demand for orders. There has been some price stabilisation.
However, this was driven by the lockdown in China and “predatory pricing” could
not be enforced.
- VSF
demand could improve by Oct-December (assumes no reoccurrence of COVID-19). Apparel needs to start selling, then fabric
followed by VSF. With malls closed, there were a lot of cancellations. With a
lot of stock sitting at stores already, this will most probably take at least
two months to liquidate inventory. China inventory days are currently c.125
days for viscose to yarn – this compares to the usual average of 10 (VSF) and
20 (yarn), with a max of 40-50 days.
- Increased
non-woven VSF demand to help rebalance supply/demand: COVID-19 has supported demand for non-woven
VSF (30% of demand) in hygiene applications, where demand has approximately doubled.
This will be supportive of a VSF market rebalancing.
- Grasim’s
VSF capacity utilisation of 30-40% is demand driven: They had 10 days of inventory going into
the shut and took 4-5 days to restart mills. Their exports are likely to
increase until demand in India picks up. Export markets include Europe, US and
China (China exports <10% of their VSF). 78% of their mils have restarted (Nagda:
155 ktpa; Kharach: 159 ktpa and Vilayat: 164ktpa). However, assuming an average
utilisation of 35%, this implies an effective group VSF utilisation of 27% (40kt
per quarter). Accordingly, we estimate that their DWP requirements could be
down as much as 73% (from 157kt per quarter to 43kt).
- Capacity expansion plans on hold: VSF expansion
from 566ktpa to 788ktpa postponed. This delay is likely to tie in with SAP’s
Saiccor expansion towards the end of September 2021.
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