Key YTD moves: Cotton +15%; Polyester +20%; HW DWP +38%; China-origin DWP +23%; medium-grade VSF +3%; high-end VSF +4% and Lyocell -8%.
VSF prices under further pressure as spinners wait on the sideline: The VSF operating rate dropped to 68% as more units were closed for maintenance and inventory days increased to 35 as VSF producers sign more orders. The VSF/DWP spread declined by 4% w/w and is now down 21% YTD. The theoretical VSF loss for Chinese producers widened further to -USD 349/t as caustic prices continue to increase. With rising costs and increasing orders, VSF prices should improve from current levels.
DWP prices marginally under pressure: DWP prices have been stable due to tight supply. However, with new business from the downstream sector low, coupled with VSF plants under pressure from lower demand and higher chemical costs, it is now more likely that DWP prices are going to drop (potentially quickly).
Background on dual control of energy consumption and energy intensity
The dual control of total energy consumption and energy intensity is especially impacting the Jiangsu region with pressure on other provinces. CCF believe that there is a larger direct impact on VSF demand rather than on VSF supply. This is driven by:
- Spinners and textile enterprises are usually totally shut down during electricity rationing due to small scale, while VSF plants shut part of lines.
- Jiangsu province is the largest VSF consumption area (>25% of China’s total), but Jiangsu’s VSF capacity occupies c.17% nationwide. Funing Aoyang that has been shut down is not affected by dual control.
- One of the common reference indicators for dual control is the y/y electricity consumption. As VSF plants maintained stable production in 2020, energy consumption in 2021 can be kept flat. However, due to the impact of the COVID in 2020, energy consumption of spinners was lower and the consumption in 2021 will be much higher y/y, so the pressure of energy consumption reduction is bigger than that of VSF companies.
Besides the impact on supply and demand, dual control will cause higher prices for chemicals used to produce VSF, such as caustic soda. Accordingly, dual control cannot be simply regarded as negative factor for forecasting prices.