China Synthetic Fibres Fall Further

By John Richardson

CHINA’S synthetic fibres chain continues to show serious signs of distress as a result of weak domestic and export demand, according to my ICIS colleagues, Judith Wang and Becky Zhang.

Traders in monoethylene glycol (MEG) must have believed the theory that petrochemicals demand growth in general would be strong, as inventory levels in Chinese ports are estimated at 800,000 tonnes – close to record levels.

MEG was supposed to have a fantastic year due to strong growth and lack of new capacity. A “supply gap” had, in theory, opened up following completion of the last big wave of Middle East plants.

The problem is the extent of damage to demand caused by the big structural changes taking place in the economy.

In addition, as my colleagues have identified, China’s apparel and non-apparel export trade is struggling as a result of economic problems in the West.

“A number of Chinese polyester makers said that the peak manufacturing season for textiles may not kick in as usual in March, given soft external demand amid a general weakness in the global economy,” they wrote.

And, as my fellow blogger Paul Hodges points out, falling cotton prices are another factor behind declining demand for polyester. Exceptional circumstances, which drove-up cotton prices in 2010-2011, might have distorted estimates of longer-term growth in polyester.

A further problem is the price of crude oil.

“Although most (emerging market) policymakers were engaged in continuous easing in the second half of last year, the mood is beginning to shift,” wrote HSBC, in a report on crude, which was released earlier this month.

“The last thing policymakers in the emerging world will want to see is a return of inflationary pressures sufficient to generate renewed social instability; after all, the rising price of basics was one factor behind the Arab Spring.”

In December, China’s demand for oil grew by just 1% compared with 8-10% in early 2011, according to HSBC.

Increasing fuel costs hurt people in China more than in the West.

The reason is that 96% of Chinese live on $20, or even less, per day. As a result, fuel and food and other basic necessities take up a bigger proportion of incomes in China than in the rich world. Food prices, of course, go up as oil becomes more expensive because of increased transportation costs.  

It is these poor people who were supposed to buy a lot more polyester dresses and shirts this year.

It doesn’t appear to be happening. Polyester yarn producers are sitting on more than a month’s worth of inventory, and are running their plants at an average operating rate of just 76%, my colleagues added.

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