Good VSF performance could worth expecting after the Spring Festival

In Jan, due to the approaching Spring Festival, the textile industry will have a holiday break, which is generally considered the slack season for textiles. However, in Jan this year, there is a noticeable lack of off-peak atmosphere, even in this cold winter, it exhibits a vibrant spring-like scene. VSF and rayon yarn inventory continues to be low, and orders are relatively abundant. The producers are also trying to shorten their holidays. Apart from profitability, other indicators are also favorable.

This scene has reminded us of early Aug 2023, which was also the traditional slack season but showed a lively atmosphere. It mainly manifested in the following aspects:

1. Rayon yarn mills maintained high capacity utilization rate of around 90%. According to CCFGroup's data, the operating rate of 100% rayon yarn maintained at 51.5% at that time, and currently, it has risen to 55%.

2. Inventory at various stages was low. In Jul of 2023, rayon yarn inventory did not change significantly at 28.5 days. At present, the inventory of rayon yarn is 22 days.

3. Cotton prices were on the rise. In Aug, cotton prices were in an upward trend, rising from around 14,500yuan/mt to around 18,000yuan/mt. Although cotton price is currently lower than in Aug, it has rebounded from the low point of 15,500yuan/mt and increased by about 700yuan/mt. Downstream industries are also increasing their stocks of cotton yarn.

These warmer operational data clearly support a good performance of VSF in Jan. Although downstream industries will go on holiday in Feb, the holiday period this year will be significantly shorter than in 2023 and historical average levels, and the post-Spring Festival period is traditionally a peak season. Although the difference between the slack and peak seasons has become less significant in recent years, there are still some distinctions. Generally, the demand from Feb to Apr is relatively good, plus the availability of loans at the beginning of the year and less financial pressure on companies. It is expected that there will still be good performance after the Spring Festival.

However, it is also important to note that the global economic environment is currently not optimistic, and the World Bank and IMF have a negative outlook for 2024. Although Chinese domestic demand has recovered relatively well, the acceptance of prices in various sectors has not significantly improved. A steady and gradual approach may be a good choice.