Chinese upstream fibre, yarn and fabric producers are ramping up production as fears grow that the trade war with the US will hurt exports of apparel and other textile products.
Additional 10% tariffs are to be levied on a wide range of China-made textile and clothing products imported into the US from 1 September – apparently scuttling a trade truce signalled by the US and Chinese governments at the G20 summit in Osaka in late-June.
“That tranche would involve almost all garments, fabrics and yarns,” says Salmon Lee, head of polyesters at UK-based consultancy group Wood Mackenzie, speaking to just-style.
“Many Chinese producers think that exports are likely to be curtailed later in the year, so it is best to send off any exports now, thus the need to produce them earlier than usual,” he adds.
According to research by Wood Mackenzie, daily fabric transactions continue to be robust in China’s textile hub in Shaoxing city, in Zhejiang province, south of Shanghai – well above 6m to 9m metres most days over June and July this year.
The mid-year is traditionally a seasonal lull period for the polyester and textile industries in China. Historically, Shaoxing city produces 4m to 5m metres on average during this annual quiet production period.
However, polycondensation (a process that helps to produce synthetic polymers for textiles) rates in China for the past three months have been well above 86% of capacity, and utilisation rates for polyester fibres are estimated to be 76-78% in the same period.
A hike in fibre production signals a potential sharp decline later in the year, as the effects of the trade war start to set in
Some highly competitive polyester producers maintained utilisation rates of 90% or above during the second quarter of 2019 and will likely maintain or increase utilisation in the third quarter, Wood Mackenzie said in a note released last month.
However, the consultancy questions whether such output is sustainable. Whether it could help “the Chinese polyester sector, and by extension, the textile industry, circumvent any fallout from the trade war remains debatable.”
Potential decline in production
Indeed, heightened monthly production figures for virgin fibres between April and June – at almost 3.4m tonnes each month – signals a potential “sharp decline in production later in the year, as the effects of the trade war starts to set in,” it warns.
Speaking to just-style, Wood Mackenzie’s senior research analyst Tracey Zhou notes that the uncertainties surrounding the impact of the 1 September tariffs and earlier concern that they may be imposed has already translated into American importers looking for alternative sourcing opportunities in South and Southeast Asia.
This has been reflected by increased factory capacity utilisation rates – many apparel factories in Vietnam received orders early this year for six months’ capacity or even for a whole year’s capacity.
Hangzhou-based fibre consultancy CCFGroup has warned that this anticipated fall in demand for fabric made in China has already translated into production cuts in small and medium-size Chinese manufacturers. Mills producing yarn blends of polyester and cotton are now facing unprecedented inventory pressure.
After export volumes of polyester/cotton yarn kept increasing between 2016 and 2018 thanks to growing popularity of mixed yarns, Chinese polyester/cotton yarn mills have this year reported a slump in overall demand, with the trade war being blamed.
“Based on the downstream plants, the sales in major producing areas all move slowly, and both domestic and foreign sales are under unprecedented pressure,” CCFGroup said last month.
“For example, Henan, Shandong, Fujian, Jiangsu and Zhejiang all see continuous high inventory pressure of polyester/cotton yarn and many small and medium-sized enterprises cut production largely – which has never seen before,” it added.
Larger Chinese companies have also been assessing overseas investments to mitigate the US duties. For example, Zhou highlights how two Chinese textile giants with a strong background in dyeing and finishing – namely Jining-based Shandong Ruyi and Jiangsu’s Nantong Dadong – have expanded investment abroad.
Shandong Ruyi has already invested in developing a power station in Pakistan to underpin textile production and has been pursuing development deals in Nigeria and Egypt – including a textile industrial park in Nigeria and a US$2bn deal to set up the country’s first ever cotton value chain from growing to garment making. Nantong Dadong, meanwhile, has increased textile investment in Vietnam.
That said, Zhou does not expect wholesale shifts of production outside China for “dyeing, printing and finish-treatment for synthetic fabric.” Given these processes employ sophisticated technology, the complexity of shifting existing operations outside China is significant. Also “investment is huge” and regulatory compliance with environmental rules overseas “is critical” and hence difficult.
This trend is confirmed in recent data that shows China remained the world’s largest investor in spinning, texturing, weaving and knitting machinery last year.
Zhou says China could still maintain a significant position in these preparatory and finishing segments by providing fabrics to clothing manufacturers in South or Southeast Asia, even if the trade war means “it might lose the opportunity in apparel production.”
Also, there is concern that a quick and early resolution to the trade war – never to be ruled out given the sharp shifts in policy with the Trump administration – “would likely shift orders back to China, rendering some of their expensive new overseas investments obsolete,” she adds.
However, for the time being, with the trade war in full flow, Wood Mackenzie’s Lee dismisses the notion that China’s domestic demand could offset any outfall associated with additional US tariffs.
He also rebuffs concerns that the effects of higher tariffs on apparel retail prices in the US could be offset by US importers turning to cheaper fibre blends.
“Those are myopic views, as Chinese textile makers’ robust revenue flow depends on free trade – and US consumers would hardly put up with getting apparel of lower quality,” Lee says.