Financial Crisis 2008 Impact on China Chemical Fiber Industry

On Jun 10-12, 2009, The 15th China's International Chemical Fiber Conference, with the theme of "Financial Crisis and Chemical Fiber Industry", was held at Hangzhou, Zhejiang Province. During the conference, the China Chemical Fiber Association released a speech on "The Impact of Global Financial Crisis on China Chemical Fiber Industry and Response Strategies". Here in the following part, we will focus on the part of the impact of financial crisis on Chinese chemical fiber industry. In our next issue, we will go on with the part of Response Strategies.
 
1. Major Impact

Financial crisis causes sharp price fall in raw materials of chemical fibers and higher operating risks for enterprises.

The outbreak of financial crisis caused a sharp price fall in raw materials of global oil, minerals and other bulk commodities. The global oil price plunged to less than 40 USD per barrel at the end of 2008 after soaring to 147.27 USD on July 11, 2008. Entering 2009, oil price started to climb with ups and downs after adjustment at the low price level, and up to 60 USD per barrel for now.

The drastic moves of oil price cause price instability of raw materials of synthetic fiber and huge impact on chemical fiber industry; upgrade the difficulty in judging and handling raw materials, as well as the operating risk for enterprises.

Fig.2 Price Changes of PTA &EG (2008-Apr.2009)
Unit: Yuan/ton
Data source: CCFEI

Take polyester material PTA and EG for instance, regular import period would be 25-40 days for enterprises, period of domestic inventory normally would be 7-15 days. From Jul to end of Oct 2008, PTA price fell from the highest 9,800 Yuan/ton to 5,100 Yuan/ton, EG price fell from 9,900 Yuan/ton to 3,450 Yuan/ton, respectively down 48% and 65%; a monthly decrease of 28% and 46% is respectively seen by PTA and EG simply in Oct. This has caused tremendous financial losses to polyester industry and even the entire chemical fiber industry.
CPL, AN, dissolving pulp and other major chemical fiber materials have suffered the same pain.
The sharp price fall of chemical fiber materials straightly caused big cash flow losses and soaring profit losses for manufacturing enterprises. In Sep-Nov 2008, the entire chemical fiber industry saw a total loss of 1,311 million Yuan and an incremental profit loss of 3,363 million Yuan from enterprises.
In response to the drastic changes in 2H 2008, China chemical fiber industry has taken various emergency measures to respond positively. First, promote industry discipline, restore order to the market; second, focus on raw materials like PTA, take anti-dumping and other effective measures to stabilize the market price; third, promote raw materials of chemical fiber and "monthly review price system" of product in the entire industry to cut down enterprises' losses caused by price fall.
These measures work well for the industry operation and development. The results show that in case of a dramatic downturn in the market, focusing on the sources and stabilizing the market price can immediately curb the price turmoil of chemical fiber industry and even the entire textile industry.

Financial crisis has caused the growth in demand weakening; the export growth of chemical fiber and related products dramatically fell back.

The world economy growth has significantly slowed down due to the financial crisis, which has caused a demand fall in chemical fiber and related products. The total export volume of chemical fiber and knitwear products was 6,314,800 tons in 2008, a Year-on-Year increase of 11%, growth rate dramatically down 35.66%; among which, export volume of chemical fiber textile increased 2.31%, down 7.88% in growth rate; that of chemical fiber knitwear increased 28.42%, drastically down 308% in growth rate.

Tab1. Export of Chemical Fiber Textile and Knitting Textiles in 2008 Volume

In terms of domestic demand in 2008, except that hand knitting yarn and wool fabric enjoyed an increasing growth rate, the rest of the seven main varieties of downstream chemical fiber all saw different degrees of dramatic fall in growth rate, among which, yarn down 8.59%, pure chemical fiber fabric down 2.99%, blended fabric down 2.33%.

Tab2. Growth of Major Downstream Products of Chemical Fiber Industry (2008)

In 2008, China's chemical fiber output was 24.05 million tons, a record low YoY increase of only 2.3% in 26 years; the market supply was 23,155,100 tons, a YoY increase of only 0.36%, drastically down 14.2%.

Banks extremely hesitated to offer loans; enterprises were hard to do financing and exposed to huge risks from cash chain breakage.

The financial crisis has caused a drastic profit fall to enterprises, an extreme hesitation of banks to offer loans, and difficulty of enterprises to do financing; plus the great losses of cash flow resulting from the sharp price fall of a chemical fiber materials and related products in 2H 2008, enterprises mostly see a tight financial supply, especially those below 50,000 tons/year, who are even facing the risks of going bankrupt as a result of cash chain broken.

Investment increase of chemical fiber industry drastically falls back; 2009 investment sees a dramatic fall

Impact of Global Financial Crisis on China's Chemical Fiber Industry and Its Countermeasures Due to the impact of global financial crisis, chemical fiber industry slipped into a downturn trouble in 2H last 2008, enterprises began to seriously hold back their investment. Chemical fiber industry accomplishes 28.71 billion Yuan real investment in 2008, up only 5.77%, growth rate drastically down 26.13%, and 6,325 million Yuan in Jan-Apr 2009, down 16.83% YoY.

Tab3. Investment on fixed assets of China chemical fiber industry

2. Specific influences on chemical fiber industry

Market

China's chemical fiber product price has been drastically moving up and down affected by the oil price. The market prices of most chemical fiber products dropped off in 2008; the prices fell even more in Sep-Nov for most products, and climbed up with ups and downs in Jan-May 2009. Take polyester products for instance, price basically remained stable in Jan-May 2008, slightly up to an annual high in June boosted by the increase of raw materials; the market price of polyester fiber also dropped quickly in 3Q due to price plunge of raw materials plus the dismal downstream demand, and started to plummet in 2H Oct with dumping at low price. The Association promoted "self-discipline" throughout the industry in a timely manner and effectively restored order to the market and stabilized the market prices. After adjustment at the low level, the price of polyester began to rapidly bounce back in 2009 boosted by rising oil price plus resuming downstream demand; seasonal rebound in Mar and Apr still existed.

Fig.3 Price Changes of Polyester Filament and Staple Fibers (2008-Apr 2009))
Unit: Yuan/ton
Data source: CCFEI

Enterprises

• Operating rate of enterprises dramatically fell

Tab4. Operation Rate of Major Sectors of Chemical Fiber Industry

Due to a dramatic slowdown of market demand increase, the operating rate of main chemical fiber varieties dropped off in 2008 with enterprise shut down and overhauls frequently happening. Particularly as raw material price slumped in 4Q, market demand quickly shrank, operating rate rapidly fell, only 50%-60% for most industries. In 1Q 2009, operating rate has been better than that in 4Q last year although still at a low level. Especially after the Spring Festival, operating rate quickly picked up, chemical fiber inventory fell to a low level after several months of consumption, plus oil price got stabilized and slightly up, the demand for most synthetic fiber products slightly picked up. Anyway, most insiders still keep a cautious mind in terms of chemical fiber market trend in Jun and Jul, while most enterprises are still trying to control the burdens in a rational way.

• Accounts receivable of enterprises apparently increase

In Jan-Nov 2008, the account receivable of chemical fiber industry reached 22.57 billion Yuan, up 8.5% or 1.76 billion Yuan YoY. Acrylic suffered the most with 1.2 times more accounts receivable; nylon up 34.5% YoY; polyester up 5.5% also; only artificial fiber and other synthetic fibers saw a slight downslide.