High inventory in China's clothing industry has led to a backlash in upstream markets, pulling down the prices of fiber intermediate feedstocks purified terephthalic acid and monoethylene glycol to a 15-month-low.
In recent weeks, Chinese media have been reporting on the huge build in stocks at apparel companies and its domino effect on related sectors.
Warehouses of several top clothing manufacturers such as Shanghai-based Meibang Fushi and MBSKY, as well as Beijing-based VANCL were said to be bursting at the seams. And this has been the case since the third quarter of 2011. Some of them are said to be holding eight months worth of stock.
VANCL was planning an initial public offering this year but overwhelmed by high stock levels, the company has decided to postpone its IPO plans for at least two years, sina.com.cn website reported.
The stockbuild was because of rapid expansion of stores in the country, fall in export orders and shorter turnaround time between manufacturing and the goods hitting the market, according to the media reports.
All this has hit the polyester industry, where typically inventory levels of 7-10 days has grown to 20-30 days since the second half of last year. This year, inventory levels exceed two months, said a polyester manufacturer in Fujian province.
Orders from apparel makers have fallen sharply since the start of the year and customers were using any excuse to cancel, the polyester manufacturer added.
March is usually when fall and winter textile orders come in and a busy time for the polyester industry. But this year, orders are sluggish and concerns over payments have hit the sector hard.
"Last year's orders were actually higher than in 2010 but customers were slow to pay up and the profit margin was thinner compared to previous years," Chinese news website news.ef360.com quoted a cotton weaver in Fujian province as saying. "If apparel makers can't sell their stock, it means that more money is stuck and liquidity will be a serious problem."
IMPACT ON UPSTREAM FEEDSTOCKS
Last year, PTA hit a historical high of $1,528/mt CFR China on March 23, and PTA producers were enjoying production margins of more than $200/mt.
One year later, on March 22 this year, PTA was at $1,151/mt CFR China, down $377/mt or 24.67% and production margins have fallen to minus $40/mt, Platts data showed.
In anticipation of China's growth in apparel exports and to reduce its dependency on imported PTA, more than 10 million mt/year of new PTA capacity is expected to start up in the country this year.
The expansion was not in sync with upstream paraxylene feedstock, which meant that more PTA makers were seen competing for limited resources. This, in turn, pushed up PX prices. But then PTA makers found it tough to increase prices as downstream polyester demand plummeted.
At a PTA conference in Ningbo last November, several polyester makers said they would reduce their PTA contract volumes for 2012 since spot cargoes were expected to be plentiful.
They also wanted more flexibility in production operations since apparel export orders received during the Canton Fair had fallen by as much as 50%. The 55-year-old trade fair held in late October every year, is a key barometer for China's export health and a sharp fall in export orders then warned of tough times ahead.
POLYESTER FEEDSTOCK MEG PRICES PLUNGE
Another polyester feedstock, MEG, hit a historic high of $1,336/mt CFR China on September 13 last year. But since March 15 this year, MEG has fallen below the $1,000/mt psychological barrier on the back of high inventory levels. Unlike PTA, however, MEG producers are still enjoying positive margins.
Based on an ethylene feedstock cost of $1,305/mt CFR Northeast Asia on Wednesday, the theoretical production cost of MEG stands at $903/mt, a cash margin of around $92/mt.
But this is way lower than the $553/mt cash margin seen on September 13, when ethylene was assessed at $1,105/mt CFR Northeast Asia.
Market participants estimate that about 650,000-700,000 mt of MEG are stored in tanks at East China ports alone. The lack of demand from downstream polyester makers mean that market participants are unable to find storage space at the already brimming tanks. This has forced market participants to sell to avoid demurrage costs.
Even end-users were looking to sell excess stocks last week with a polyester producer offering bonded tank cargoes at $980/mt last Thursday.
INVENTORY AT NIGHTMARISH HIGH LEVELS
Clothing stockpiles are depreciating assets and the longer they remain in a warehouse, the tougher they are to sell, as seasons change and so do fashions.
One way to get rid of the stocks was to sell them at huge discounts or export them. But with the global economy showing weakness and the West still in the doldrums, export options are limited. Slower domestic economic growth means Chinese consumers are more cautious too.
"After all, buying new clothes is not a necessity," said a Chinese PTA maker. "You need a roof over your head and food in your stomach. Clothes are the last thing you need to buy if you have limited funds."
Another trader said: "A 30-day inventory level [for polyester yarn/fiber] is now considered normal. But if we think that is normal, then it means we're not expecting the situation to improve any time soon."
This also implies that end-users will have less money to buy feedstock, extending supply length and creating the specter of a glut that shows no signs of going away anytime soon.
