• Key w/w moves: Cotton +1%; ICE cotton contract +1%; Polyester -1%; HW DWP -1%; China-origin -1%, medium-grade VSF 0%; and high-end VSF 0% and Lyocell 0%. Cotton is now trading at a 2% premium to VSF (2021 average premium: 30%) and a 69% premium to polyester (2021 average: 150%). The VSF premium to polyester is currently 75% (2021 average: 94%) and the lyocell premium to VSF is currently 26%.
  • VSF prices stable: VSF op. rate improved to 69% (from 67%) and VSF inventory days declined further to 26.0 (from 25.0). The theoretical VSF margin for Chinese producers improves further but still in the red at -USD 185t. The VSF/DWP spread was up 6% w/w (-9% YTD). High-end VSF plants in China have sufficient orders currently and spinners are active in taking delivery of the goods due to concerns around logistics. Medium-grade VSF plants were still seeking buyers due to fewer orders compared to high-end VSF. CCF expects further pressure on medium-grade VSF as large-scale VSF plants still have considerable unfulfilled contracts. However, further downside is limited by the current high-cost environment.
  • Lyocell market continues to be mixed: The operating rate of lyocell industry dropped 900bps w/w to 50% (from 59%) as some plants remained close due to lock downs.
  • DP prices remain under pressure: The spot hardwood price is down to USD 948/t and the DWP/pulp spread is currently USD 84/t (this level generally supports preference for paper pulp production over DP production). Domestic DP price also down 1% w/w to RMB 8,150/t (USD 1,146/t, a USD 198/t premium to imports). Chinese mills continue to favour paper pulp production, with no DP being produced. Downstream plants kept normal restocking without high enthusiasm for building up more DP stock. CCF expects further pressure on domestic hardwood DP, with the import price expected to remain stable.
  • Lenzing Q3 22A saw margins come under pressure: In terms of key projects, the Thailand lyocell expansion is already EBITDA breakeven, while the DP JV (LD Celulose) is EBITDA positive (EBITDA margin: 44% on only 44kt). Lenzing remains comfortable with a LT DP price of USD 900/t. In 2023, they are expecting good demand for their DP internally as well as third party given the quality. EBITDA guidance was USD 600/t (USD300mn) assuming full ramp-up; however, considering current inflation, (including logistic costs), they expect EBITDA/t to be softer than this. In terms of Lenzing’s outlook statement, the company is flagging a further drop in textile demand.
  • Grasim Q3 22A VSF EBITDA margin came under pressure, dropping to 8.3%: This was on the back of cost pressures (DP, energy and caustic soda: -15% q/q & +56% y/y) and lower volumes. (-14% q/q). VSF capacity now stands at 824ktpa. Grasim thinks it could take a few quarters for demand to improve and expects margins to remain under pressure. Accordingly, they expect to rationalise VSF capacity from 93% to 70% until destocking across the textile value chain takes place. There are no plans to increase VSF capacity further (current DP integration: 35% to increase to 37% post debottleneck).

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