How overcapacity in China could reshape fibre markets
Excess polyester capacity in China has implications for global markets
In advance of the World Fibres Conference in Hong Kong later this year, Will Chapman, PCI Wood Mackenzie's head of fibres, assesses how excess polyester capacity in China could reshape global fibres trade to 2017.
The first half of 2016 has seen a surge in Chinese polyester yarn exports, up 19% with marked increases in May and June. The main growth is in polyester textile filament (PTF) with some types up by as much as 73% on 2015.
Polyester staple fibre (PSF) exports are remarkably flat, being largely a balance between higher exports to Indonesia, Mexico and Vietnam, and lower exports to Pakistan, India and the US. Pakistan used to be the second-largest destination for Chinese PSF but imports are down – 42% so far in 2016, following anti-dumping actions.
We expect China to export 1000ktes of PSF by the end of 2016, but filament exports may hit 2200ktes, an increase of more than 30% on 2015.
Where is it all coming from?
Despite closures totalling a capacity of 2350ktes per annum reported in PCI Wood Mackenzie's July Fibres Report, there is still significant excess capacity in China's polyester fibre industry and this is driving the export boom.
In part, this is the result of slower than anticipated growth in Chinese domestic demand. In particular, Chinese consumer expenditure on clothing and footwear has seen weaker demand growth in recent months, which was not expected when the current capacity increases were signed off: China's clothing expenditure growth was only 1% at June 2016, much lower than the 4% growth achieved in the same period in 2015.
Apparel demand is also weakening in two of China's major textile and apparel export regions, the US and Europe. Expenditure on clothing and footwear in the US in the first half of 2016 grew at less than 2%, compared with over 4% growth in the same period in 2015. Retail sales growth in the EU28 continues to hover around zero this year, reflecting the wider economic uncertainty in that region, versus a 1.6% increase in the first quarter of 2015.
The surge in China's exports of polyester filament in 2016 might have resulted from the need to increase stocks in advance of the closures around the G20 Summit. However this outage in August and September is small compared with the total increase in production.
This means, in our opinion, that we're seeing signs of structural growth in Chinese polyester output, which will continue after the G20 summit. But it's important to note that is growth in output and does not necessarily reflect growth in demand.
What does this mean for the industry worldwide?
Global polyester markets will undoubtedly be affected by China's excess capacity. First, China's downstream fibres industry – weavers, dyers and finishers and garment make up – is not growing in step with fibre production capacity. So some of these activities will need to move abroad.
This trend is exacerbated by the move in China to high technology industries and a clampdown on industries with greater environmental risk (such as dyeing).
As a consequence, PCI Wood Mackenzie expects to see an increase in fibre exports to countries such as Vietnam, Cambodia, Thailand, Bangladesh and Indonesia, which are taking over some of the downstream capacity that cannot be met in China.
Second, in South America, Turkey and Egypt, China and India are fighting for market share in the polyester textile filament (PTF) market.
In the US, imports of PTF are down reflecting the weaker market, but imports of polyester industrial filament (PIF) are still growing, albeit slowly. There, China's share of the import market is holding at around 70%, as Chinese companies attempt to displace both Korean imports and local American producers.
Can global demand growth absorb additional Chinese production capacity?
As global GDP rises and the population grows, demand for polyester is increasing. However, my team and I do not believe that this will be sufficient to absorb all the output from the excess capacity.
We expect some lost share as PTF eats into the market share of other fibres, displacing cotton in apparel and interior textiles. In parallel we expect to see PIF displacing more nylon in technical applications, including airbags.
But this year's trend is about more than just substitution of one fibre for another. The pattern of polyester trade itself is starting be affected, as Chinese exports displace polyester production from other regions.
In the past, Chinese customers may have suffered from issues of quality or customers perceive a lack of commitment to long-term supply and little support. We expect this to change as Chinese exporters improve product quality and build relationships and networks that will last long into the future. These changes will also take into account the impact of anti-dumping actions.
Can the world count on low-cost polyester fibre from China?
PCI Wood Mackenzie will continue to monitor China's polyester filament exports closely, to determine whether the surge in the first half of 2016 was a temporary lift in anticipation of closures around the G20 summit or whether this represents the start of a permanent increase in output.
One conclusion is clear: the current higher export levels will have a long-term effect on investment decisions and polyester strategy for producers worldwide. If global markets can now rely on low cost fibres from China with ever-improving performance, then making the case for investment in new capacity elsewhere will be more challenging.
Hear more from Will Chapman and his team on China and other trends affecting the Global Fibres industry at the PCI Wood Mackenzie World Fibres Conference in Hong Kong on 9-10 November 2016. Click here for more information.
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