Opportunity comes again with widening price gap of cotton, lyocell and VSF?

Cotton price has gradually risen as ZCE cotton futures has reached 16,000yuan/mt. The main reason is that there is speculation in the market amid new cotton planting area, the expectation of rushing to harvest seed cotton in the second half of the year, the weather condition in the main cotton producing areas, and the subsidy policy of Xinjiang cotton target price. Moreover, the price of cotton is expected to remain strong in May. However, VSF and lyocell prices are mainly stable, and cotton-lyocell and cotton-VSF price spread is approaching 1,000yuan/mt and 3,000yuan/mt respectively. Will the substitution of raw materials emerge again in downstream market?

At present, the inventory of cotton yarn is at a low level. Although the price has begun to rise, the support from demand is insufficient, and the increase is not as high as that of raw materials. If the situation continues, the pressure of losing money by spinning mills will be gradually increasing. According to the experience, when the cash flow also turns negative, production cut or conversion is the choice that enterprises need to pick up.

Compared with cotton prices, both VSF and lyocell have price advantages, and lyocell yarn, cotton/lyocell yarn and cotton/viscose yarns are also more profitable and attractive. It is just that the current low inventory of cotton yarn gives a buffer period to the companies, thus the rise in cotton prices and the subsequent development of cotton yarn inventory accumulation determines whether or when downstream companies choose to switch raw materials. According to the last round of market situation, the high cotton price lasted for at least one quarter before the downstream plants finally switched to lyocell products.

Although it is difficult to be profitable of 100% rayon yarn, the spinners could still survive. Judging from the holiday schedule of the Labor Day holiday and the feedback of post-holiday sales, the selling pressure is acceptable in the short term. To sum up, in addition to the upstream and downstream of its own industrial chain, it is recommended to pay more attention to the changes in the cotton textile market.

Detailed analysis about the market could be obtained through the 17^th China Hangzhou Cellulose Fiber (Viscose) Industry Forum & 3^rd Lyocell Industry forum to be held during May 23-25, 2023.