Q2 terminal demand may still not optimistic

Recently, downstream market performed worse than earlier anticipation. Domestic and export orders were both very bad in fabric mills and printing and dyeing plants. The production of samples was limited too. Some market players thought the performance of 2022 may be even worse than 2020. Downstream plants had orders when the COVID-19 pandemic broke out in 2020. Some orders were canceled or postpone when the spread of pandemic deteriorated and some nations implemented blockaded measures outside China in late-Mar. In Q2 2020, players’ confidence and orders started recovering. Factories were willing to hoard up stocks as oil price was low at that time. However, there were some internal and external problems this year.

The spread of pandemic has worsened in some regions of China, including Jilin, Shanghai, Guangdong and Fujian, with many new infected cases and asymptomatic carriers.  In addition, the locally transmitted new COVID-19 cases remained high in China in some cities. That means the spread of pandemic is still undergoing.

The pandemic greatly impacted various industries, especially the consumption. The prevention and control of pandemic was austere this time, with longer durability and many infected cases. In the past, the spread of pandemic reached its peak about 10 days after the outbreak, but this time it has occurred for more than 20 days and the number of new infections in many provinces has not shown a downward trend.

Many apparel wholesaler markets were closed temporarily with ongoing spread of pandemic, weighing on the offline consumption. The online consumption was also impacted after couriers of SF Express, a major express company in China, was infected. The consumption of spring apparels was seriously dragged down due to the pandemic. Many spring apparels have become stagnated inventory. Terminal market faced pressure from inventory and capital.

Stifled logistics made demand worse. Affected by the continuing outbreak of the epidemic, some areas have issued the latest control policies for freight vehicles and drivers and passengers. In addition to providing the 48-hour nucleic acid negative report, health codes, and travel code and conducting on-site nucleic acid sampling in medium-and high-risk areas, it is also necessary to apply for electronic vouchers in advance. Special channels have been set up in some areas, and nucleic acid sampling and antigen testing service points in highway service areas have been set up to ensure the safety of all parties. Some export cargos could not be delivered due to the prevention and control of pandemic in Shanghai. Some export-orientated enterprises had to wait for the alleviation of pandemic or transfer cargos to Ningbo.

Sales of grey fabrics were slow after logistics were blocked. Stocks of grey fabric kept mounting. The warehouse of some warp knitting plants has been full. High inventory occupied a lot of capital. Many fabric mills intend to shut down for the coming Tomb-sweeping Festival (Apr 3-5) to mitigate own inventory burden. According to the statistics from CCFGroup, the operating rate of fabric mills in Zhejiang and Jiangsu dropped by 15 percentage points from 76% in early-Mar to 61% in end-Mar, which will decrease further during the Tomb-sweeping Festival. The operating rate will gradually recover after holiday, but the increment depends on the control of pandemic and downstream business.

As for the forecast for terminal demand, the pandemic is very critical for the recovery of demand in short run, especially domestic demand. After all, apparels are seasonal products. The consumption of it will be greatly dragged down if the control of pandemic is late. Based on the spread of pandemic now, we expect it will not be effectively controlled before late-Apr optimistically, and the regular travel of people may appear in May. It means the consumption of spring clothes will be missed. Undue such circumstance, enterprises will encounter inventory and capital pressure due to stagnated sales and the placement of orders for summer will be affected. Actually, many textiles and apparels enterprises are cautious in hoarding up summer apparels and fabrics amid pandemic. One apparel company in Guangdong announced to suspend production for holiday in Q2, which incarnates players’ worry of summer wear sales. Therefore, we still do not hold optimistic view toward domestic demand for textiles in Q2.

From the aspect of export demand, the consumption is supposed to see descending growth rate from high level according to the following 3 reasons: firstly, consumption witnesses falling growth when price of oil and natural gas surged and inflation was high abroad. Secondly, inventory of fabrics for apparels has recovered to pre-pandemic level outside China. The restocking space may be limited later. Thirdly, the recovery of textiles and apparels exports in Southeast Asia may apparently squeeze the share of China’s textile and apparel exports.

Domestic and export demand is expected to both face big pressure with the spread of pandemic in local China, stunted logistics, mounting stocks on downstream market, high oil price, the Russia-Ukraine conflict, inflation outside China, falling consumption and the production recovery in Southeast Asia. Demand for textiles and apparels may be hard to deserve anticipation in Q2. In the second half of year, if market status eases at home and abroad, the spread of pandemic is controlled effectively in local China, and there are support from government policies, demand is likely to improve to a certain extent.