O/R of polyester end-users may decline during May Day holiday T/C core spandex yarn

Polyester filament yarn market stepped into downward course since mid-Apr, and the reduction accelerated in recent days. More PFY plants discounted offers. Overall decrement of PFY was largely around 350-600yuan/mt, and FDY took a lead in falling, with the biggest decrement. The price of FDY 150D hit yearly low.

PFY plants cut price to promote sales, but sales failed to improve much, with average sales ratio at around 60-70% in recent period, and only some plants with big discounts witnessed obviously rising sales. With the coming of the May Day holiday, inventory burden of PFY market is big.

Why does falling price fail to stimulate sales ratio substantially? 
*Firstly, feedstock market does not stabilize, still under downtrend. The reduction of PX speeds up in recent two weeks, and PTA market is firm now but high processing gap has risk to be squeezed. MEG price is hitting new low on high inventory.

*Secondly, end-users market suffers losses. Some sparse twisting plants are still not profitable. The price cut of DTY is even faster than that of POY in recent days, and some grey fabric descriptions are under deficit.

*Finally, end-users witness big inventory burden. The inventory accumulation is faster than anticipated in Apr, and finished goods stocks occupy many capital.

The inventory accumulation of downstream market faster than anticipation since Apr

Sparse twisting plants: shorter around 7-10 days and longer at 15-20 days, even higher, in the major twisting bases in Zhejiang and Jiangsu

Stocks of grey fabric: low in circular knitting market in Xiaoshan and Shaoxing, around 15 days; around 1 month in warp knitting plants in Changshu and Haining and water-jet plants in Wujiang and Changxing. Current average inventory index was higher than the high in 2018, and higher than the average in 2016-2018, approaching the high in 2017.

With high inventory burden of finished goods, massive capital is occupied in the twisting plants and fabric manufacturing units.

Reason conjecture for plain new orders of fabric manufacturing market in Mar-Apr and rapidly mounting stocks of grey fabric 

*Sluggish export: partial demand was pulled forward affected by the Sino-US trade conflict. Export orders improved in 2018, but the actual consumption was doubtful; export rebate was revised down by 3%, which impacted the income of grey fabric plants was they relied on rebate to gain some profit under low profit before. The export price raise of grey fabric inhibits demand; the configuration of overseas fabric manufacturing industry improves, mainly the increase of twisting capacity and fabric production capability in South Asia, resulting into intensified competition.

*Slack domestic sales: The stocks of textiles and apparel have accumulated to a high level in 2017-2018. Fabric manufacturing plants took the delivery of goods slower entering Mar; Feedstock market may be bearish in later period despite of high price now, and the cost side is supposed to be depressed more with intensive production launch on feedstock market in the second half of year; thus, the procurement activity of downstream players is dampened; after experiencing high-speed capacity expansion in 2017-2018, the supply growth rate of end-user market is higher than the growth rate of GDP and domestic retail consumption, with fiercer low-priced competition.

Operating rate of downstream market is likely to decline during the May Day holiday
Currently, the price idea gap of downstream players and PFY plants still exists, and the high feedstock inventory of end-users still needs time to consume. Especially, the news about the production suspension of some dyeing plants is expected to heighten the possibility of twisting units and fabric manufacturing plants to suspend production for holiday.

End-users may stop production to consume stocks during the May Day holiday on limited capital. Based on the reflection from downstream players, plants that witness sound sales and low stocks may face limited pressure to stop production, while plants that see high inventory may have higher possibility to suspend production, and some plants may cut run rate by 30-40%.

In short run, if operating rate of twisting units and fabric manufacturing plants reduces further during the May Day holiday and end-users still see slow sales, PFY plants will witness longer stocks accumulation, which may weigh on its cash flow and run rate.