Under tariff issue, the impact on PFY demand mainly lies in active destocking

In the week following the Qingming holiday, the market has been primarily focused on one issue-tariffs. The situation has developed to a point where the U.S. has provided a 90-day negotiation window to countries other than China, while increasing tariffs on Chinese goods to 145%.

The evolution of the polyester industry chain has also revolved around tariffs.

On one hand, historical experience shows that tariffs have a certain negative feedback on crude oil prices. As a result, the deterioration in demand expectations driven by tariffs, combined with the financial attributes of crude oil, has led to a wave of asset sell-offs and the implementation of hedging and defensive trading strategies. Consequently, crude oil price has significantly dropped, although it remains volatile. However, due to the potential for policy changes and the difficulty in assessing the extent of economic damage, there is considerable uncertainty regarding the future direction and absolute value of crude oil price.

As the source of the polyester industry chain, the rapid decline in crude oil price has already led to a quick devaluation of various products along the polyester supply chain.

In the short term, the volatility of crude oil price is having a greater impact on the prices of raw materials for polymerization than the supply and demand dynamics at each stage. Therefore, in the case of polyester products like polyester filament yarn, the costs and the pricing center for the future market have not yet been effectively determined. The downstream sectors, such as DTY and fabric manufacturing markets, are showing a significant lack of enthusiasm for building inventory or preparing raw materials, which will likely result in short-term actions to halt production and digest inventory. Meanwhile, buyers in other countries are also entering a wait-and-see mode, holding off on purchases to await lower absolute prices.

On the other hand, with the rapid increase in tariff policies, it is difficult for the supply and demand sides in any market to absorb and digest the changes quickly; players can only make swift trading cuts. Therefore, within textiles and apparel and upstream segments, the total demand loss after cutting ties with the U.S. market must be confronted in the short term. The pathways for shifting trade have yet to effectively compensate for this, as the entire market is currently observing price movements. If the market cannot stabilize effectively in the short term, the focus will primarily be on digesting raw material inventory and product stocks. At present, the inventory from PFY to downstream processes such as DTY, fabrics and textiles and apparels is relatively high, and it will take some time to digest.

DTY plants and fabric mills have reacted to weaker demand recently. They further cut run rate to control the inventory. The operating rate of corresponding printing and dyeing mills also dropped. Some downstream plants shut down for the Qingming Festival. The run rate did not rise but declined after the holiday. The operating rate of DTY plants, fabric mills and printing and dyeing mills in Zhejiang and Jiangsu slipped to 78%, 63% and 75% respectively now and the run rate of fabric mills in South China reduced to 46%, down by 7, 11, 4 and 11 percentage points respectively over the high point in March. The operating rate of fabric mills slipped the most quickly for the time being.

Concurrently, there was a loss in supply and demand of PFY. Players lacked confidence to have speculation. The inventory of PFY was at the hands of PFY companies. The inventory of POY and FDY was at 27.7 days and 31.6 days respectively in Zhejiang and Jiangsu in PFY companies, with a combined total close to one month, nearing historical highs. When compared to previous peak periods, structural differences existed, with current pressures on FDY being greater than on POY. As DTY and fabric markets continue to experience negative feedback, if PFY factories do not effectively control supply, their inventory pressure will likely increase further, possibly exceeding the highs seen in 2022.

Once the demand side enters a period of inventory digestion, it will be relatively difficult to compensate for seasonal demand losses. If PFY factories do not curb supply, the inventory will rise further. Even if concerns about conflict dissipate, the market's overall rebound will predominantly result in just speculative inventory transfer.

Regarding the cash flow of PFY, the recent decline in raw material costs has led to a nominal increase in cash flow; however, this nominal increase is not being realized in sales. Moreover, the depreciation of inventory across the supply chain exceeds the current nominal cash flow, meaning factories can only slightly mitigate depreciation pressure through financial hedging tools.

In the medium-to-short term, it is inevitable that export orders to the U.S. will experience temporary stagnation and cancellations due to tariff factors. Other regions, including Southeast Asia, South Asia, Africa and the Middle East, are seeing a 90-day window that may allow for the shipment of some previously delayed orders (mainly those related to China to intermediate countries for processing and then to the U.S.), particularly in nearby Southeast Asian countries. However, in more distant regions, transportation and processing times remain insufficient to facilitate recovery. Orders in consuming markets elsewhere are also on hold due to rapid price declines along the supply chain, as the entire market grapples with fluctuating policy expectations. Both price confidence and demand confidence are lacking, pushing the market towards a proactive inventory digestion phase. In the short term, the negative feedback on PFY demand is unlikely to reverse, with future developments mainly focused on supply-side actions.