• 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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