Why can spandex producers run at high capacity?

With the worse spread of pandemic and slack domestic and export orders, the operating rate of fabric mills declined. Weaker downstream market weighed on polyester, nylon and spandex market. The operating rate of spandex plants reduced while the reduction was smaller than that of NFY and PFY enterprises. Why can spandex plants run at high capacity?

Firstly, spandex has high requirement for plant stability and belongs to chemical enterprises that need continuous operation. Spandex plants mostly ran at higher capacity than that of PFY and NFY factories in history. The operating rate of spandex, NFY and PFY plants was high and hit multi-year high in the second and third quarter of 2021, declined in Q4 2021 and Q1 2022 affected by the regulation of electricity consumption and the Spring Festival holiday and rapidly rebounded after Spring Festival holiday. The run rate of NFY and PFY plants quickly fell in end-Mar with worse spread of pandemic in some regions of China. Current operating rate of PFY plants, NFY producers and spandex factories declined by 20.2 percentage points, 13 percentage points and 4 percentage points respectively compared with the highest level in H1 2021 to 71.1%, 74% and 93% respectively. Spandex plants still ran at around 20 percentage points higher of capacity than NFY and PFY factories.

In terms of inventory, the inventory of NFY and PFY has been high since the outbreak of pandemic. After experiencing prosperous cycle, the inventory of spandex factories has accumulated to above 37 days, ending up with obviously higher inventory burden, but was still during medium level.

As for the cash flow, spandex market witnessed high prosperity in 2021, with the cash flow of 40D averaged above 17,000yuan/mt, with a ten-fold increase over the same period last year. However, the cash flow greatly shrank after spandex price quickly decreased, which has been near the break-even line. Comprehensively taking the cash flow of 30D and below and differential spandex into account, the cash flow of spandex industry still outperformed than NFY and PFY market.

Spandex industry witnesses capacity expansion peak in 2022 and the increase in leading companies is high. The price competition intensifies again on spandex market, which is similar to that in 2018-2019. In addition, global economy has increasing uncertainty in 2022. The growth rate of demand is expected to be hard to follow that of supply. Some export orders of textiles and apparels flow back to Southeast Asia. Spandex market is supposed to encounter pressure from growing capacity and weaker demand.

Spandex plants are still expected to run at high capacity in short run as the profit is good. The inventory burden heightens but remains acceptable. In addition, the Asian Games will be held in Hangzhou, Zhejiang in Sep. Some factories nearby may suspend production as a result. Therefore, some factories intend to hoard up some stocks to retain customers. If demand remains muted affected by the pandemic, stocks of spandex are estimated to continue mounting and spandex price may head south. Production curtailment will appear if the price falls to be lower than the break-even line.