Polyester: pay attention to downside risk of demand in Q4

Downstream fabric mills were active in controlling stocks at hand affected by the COVID-19 pandemic in the first half of 2020. Stocks of the whole downstream market rapidly declined in the second half of last year after domestic and export demand spiked. There was even no goods to sell on the market. Downstream players witnessed extremely hot business in Q4 2020 and were lucrative amid low feedstock price, which never appeared for multi-years, especially twisting plants, knitters and home textile producers. 

Except for recovering domestic demand, external demand also improved since the second half of last year, especially in US. Retail sales of apparels in US increased by 4.7% in Jan-May, 2021 compared with the same period of 2019, indicating demand having recovered to the pre-pandemic level. Apart from recovering demand in Europe and US, the order transfer from Southeast Asia to China also boosted export in China. 

There were apparent order transfer. In the past years, many labor intensive textiles and apparels industry was relocated to Southeast Asia attracted by the labor cost advantage. As a result, exports of apparels were poor in China, keeping negative growth for several years. However, some orders for textiles and apparels were transferred to China from Southeast Asia since the second half of 2020 as the pandemic was relatively better controlled in China. Many Chinese fabrics were exported to Southeast Asia and made into apparels for export before, while some apparel orders shifted to China. It was not necessary to export fabrics as Chinese exporters could directly export apparels now. Therefore, exports of apparels saw rapid growth rate, while exports of traditional textiles saw negative growth rate after deducting exports of mask. Such order transfer is expected to be short-lived and orders will flow back after the pandemic being controlled well in Southeast Asia.

Many downstream plants increased machine in 2021 with good profit since the second half of 2020, especially in Q4. Some have prepared stocks in advance for the peak season in the second half of year in expectation of inflation, recovering demand and rising crude oil price and most ran at high capacity. Downstream demand is anticipated to be good in the first three quarters. 

Stocks have been high before the traditional peak season Sep-Oct, while this peak season may last for short period as many participants have prepared a lot. Bearish view is held toward demand for polyester market in the fourth quarter after peak season ended. The performance in this Q4 may be apparently contrary to last Q4. Meanwhile, in long run, after players on the value chain finished restocking, exports of textiles and apparels may reduce again with marginally weakening demand recovery in Europe and US, the back-flow of orders to Southeast Asia amid eased pandemic. Excessive capacity may appear again on textile market after market cooled down.