Polyester: Bearing pressure while propping up raw materials

1. Local downstream demand is seemingly a bit better than before the May Day holiday, but the actual pressure is still significant, and there is also great uncertainty in expectations. On the one hand, the domestic sales off-season is approaching. On the other hand, will the US tariffs be reduced?

In terms of foreign trade, at the end of April, a few foreign trade enterprises that directly export received notice from US customers that the previously suspended US orders could resume delivery. A small portion of the tariffs is borne by Chinese suppliers, and most of it is jointly borne by US importers and consumers. However, most foreign trade enterprises are still in price negotiations, on the grounds that their profit margins are too low to bear even a small portion of the tariffs.

The previously stranded processing and re-export orders in Southeast Asia are still being delivered normally. Due to the 90-day tariff exemption period, there is a certain amount of export grabbing to the US from Vietnam. But it is understood that this export grabbing is more about rushing to deliver the existing orders rather than having a large number of new orders. The reason is that the production capacity in Southeast Asia is limited, and the volume of new orders that can be undertaken is relatively small. According to the customs data of Vietnam, the export value of textile and apparel in April this year exceeded 3.5 billion US dollars, an increase of 13.9% compared with April 2024. This data was actually not a very strong export grabbing and had limited driving force for the import of raw materials and fabrics from China.

During the May Day holiday, some customers reported that orders from North Africa, Russia, Europe and other places were placed, and the goods were urgently requested. There were indeed some enterprises that were quite busy in production.

In terms of domestic sales, at the end of April, futures rebounded, and some domestic fabric merchants replenished low-priced grey fabrics to offset the previous high costs. This phenomenon was more common in the warp knitting industry in Haining. The inventory has slightly decreased, so the operating rate of warp knitting in Haining has recovered to about 70% after the holiday.

There were also some individual products such as the air layer on double-sided circular knitting machines. This product is for the autumn and winter of the second half of the year. Recently, terminal customers have started to stock up, and some orders have come in. After the holiday, the operating rate of double-sided circular knitting machines in Shaoxing was slightly higher than before the holiday.

However, everyone still expresses concerns or believes that there is a great deal of uncertainty regarding future order acquisition. 1. The cross-border e-commerce tax exemption policy ended on May 2. 2. As the weather gets warmer, domestic sales are starting to enter the seasonal off-season. 3. There is still uncertainty about whether the US tariffs that everyone is expecting to be reduced will actually be lowered. Recently, many market participants believe that the high US tariffs cannot be sustained, and subjectively think that the tariffs may be reduced in May or June. If the tariffs can be reduced to within 50%, then half of the US orders can be taken. Specifically, Chinese suppliers may bear 5-10%, US importers may bear 15-20%, and the remaining 20-30% can be passed on to US consumers through price increases, which may be barely acceptable. If the tariffs can be reduced to 20-30%, then most of the US orders are estimated to have few problems.

2. Polyester companies see eased inventory burden and the run rate rapidly rises. The resilience of polyester polymerization rate exceeds market expectation under low price and competition view while the inventory continues increasing.

PFY plants saw eased inventory burden after sales improved intensively in end-April, with inadequate momentum to cut production further. Some PFY plants will restart, including 500kt/year from Rongsheng (delayed into mid-May) and 400kt/year from Hengyi Yitong. Only 200kt/year of PFY unit from Jinlun will have turnaround and is delayed into May 17. As for the startup of new units, it includes 400kt/year from Xinfengming Zhonghong's phase II project (said to start operation next week), 300kt/year from Tongkun Anhui and 300kt/year from Fujian (to be postponed into June).

PSF plants do not see large inventory burden but the processing spread is compressed recently (not to cut production for the time being). The operating rate of PSF plants has increased to 91.3%. The maintenance of 200kt/year PSF unit from Jinlun is delayed into May 17. Units in Zhejiang and Jiangsu who had turnaround before also gradually restart operation. The overall operating rate of PSF plants remains high.

Export orders of PET bottle chip were near 690kt/year in April, up 68.6% on the year and 25.8% on the month respectively, when it is tariff-exempt product and its low price attracts overseas customers. It was close to 700kt again when the orders hit historic new high at 710kt in September 2024. Factoring into the big price spread between Chinese and overseas PET bottle chip, if roughly calculating into the traders orders from domestic sales to export, the export orders in April may be near or even exceed 800kt. Sanfame's 750kt/year unit plans to restart operation in short run. The momentum to cut production is not strong in May and June. Most will decide based on the status in July.

The inventory of downstream grey fabrics, the order-taking situation, and the operating rate are similar to those in the same period of 2022. On the demand side, there was a blockage due to tariff issues and weak market confidence. However, the difference from 2022 was that in 2022, it was a situation of high costs and low demand. Both downstream DTY plants, fabric mills and upstream polyester factories were quite decisive in reducing production. This year, it is in a state of low costs and low demand. Downstream enterprises are forced to stop production due to limited storage capacity. However, there has always been a mentality of bottom-fishing for raw materials at low prices, resulting in increased production volume of polyester when the prices were at a low level in early April and at the end of April. Polyester factories, especially large ones, are more willing to continue production rather than cut production on the premise of not having overstocking. Large polyester companies are not strong in taking a lead in cutting production this year.

The polyester polymerization rate is high and increasing downstream DTY plants and fabric mills cut production. The middle link faces mounting inventory. Although polyester companies lower inventory periodically by cutting price for promotion at the end of month and at the beginning of month, the actual inventory still tends to accumulate when it hasn't reached the limit of endurance, and the weather temperature isn't high either.

3. High polyester polymerization rate supports the demand for polyester feedstock, which will test the later tolerance limit on the inventory throughout the industrial chain.

In short run, major polyester products producers do not have the ground to cut production. The estimate for the polyester polymerization rate in May is revised up to 94.5% in May and to 91.5% in June. Meanwhile, some PTA units confirm the turnaround recently. With high polyester polymerization rate, the inventory of PTA is estimated to fall significantly. The price of spot PTA is anticipated to fluctuate in line with the cost side in short run.

In the later stage, considering the off-season for domestic sales on the demand side and the pressure of foreign trade tariffs, it will test the inventory endurance limit of the industrial chain. If the US tariffs do not drop for a long time, coupled with the high-temperature days in the future, the industry may find it difficult to withstand the pressure of high inventory. There will be a definite trend of production cuts in June, July and August, and the extent of production cuts will gradually increase. If the US tariffs can really drop, for example, to 50% or below, there will be replenishment actions in the US. At the same time, market confidence will be restored, panic sentiment will be alleviated. There may be effective inventory reduction in the upstream and downstream of the polyester industrial chain in the short term. By then, the downward speed of the polyester polymerization rate can be stabilized or slowed down.