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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
Data Source: General Administration of Customs
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)
Data Source: National Bureau of Statistics
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
Data Source: National Bureau of Statistics
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
l Operating rate of enterprises dramatically fell
Tab4. Operation Rate of Major Sectors of Chemical Fiber Industry
Data Source??CCFA
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.
l 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.
Tab5. Accounts Receivable of Chemical Fiber Industry (Jan-Nov, 2008)
Data Source: National Bureau of Statistics
l Enterprises suffered huge losses of cash flow and profit plunge
Due to a price plunge of raw materials, inventories of enterprises quickly depreciated; enterprises suffered great losses of cash flow. According to incomplete statistics, China chemical fiber industry lost another 3.5 billion Yuan simply in Sep-Nov 2008.
Industry
l Supply of chemical fiber industry sharply fell, and picked up in 1Q this year
In 2008, China??s chemical fiber output is 24.05 million tons, a record low YoY increase of only 2.3% in 26 years; the market supply is 23,155,100 tons, a YoY increase of only 0.36%, drastically down 14.2%. Total supply is 5,615,000 tons in 1Q 2009, up 8.47% YoY, annual growth rate up 8.11% over 2008, which indicates an upturn for downstream chemical fiber market in 1Q.
The growth rate of chemical fiber supply maintained to be above 12% from 2000 to 2007, but fell 7% in 2007 over the last year. According to statistics of the year end, 2008 chemical fiber supply already saw a negative growth of 2.4%, down above 15% over 2007.
Fig4. Growth of Chemical Fiber Supply in China (2000-2008)
(Source: National Bureau of Statistics & General Administration of Customs)
l The entire chemical fiber industry has seen a sharp fall in profit
In Jan-Nov 2008, the entire chemical fiber industry achieved a total profit of 3,402 million Yuan, dramatically down 74.89% or 10.15 billion Yuan YoY; profit loss of enterprises amounted to 7,489 million Yuan, soaring by 280% YoY; 26.71% of chemical fiber enterprises suffered losses, up 9.47% YoY.
l In Jan-Feb 2009, the entire chemical fiber industry achieved a total profit of -127 million Yuan, dramatically down 110% or 1,330 million Yuan YoY; profit loss of enterprises amounted to 1,538 million Yuan, up 90.81% YoY; 30.96% of chemical fiber enterprises suffered losses, up 2.59% YoY.
Tab6. Gross Profit of Chemical Fiber Industry
Source: National Bureau of Statistics
Current market situation indicates that downturn in 4Q 2008 has remained in Jan-Feb 2009, plus the influence of Spring Festive, leads to a bad profit performance. The industry profit is estimated to notably pick up in Mar-May.
l The entire chemical fiber industry has seen a notably falling operating quality.
The operating quality of chemical fiber industry fell in an all-round way; total industry value in Jan-Nov was 371.2 billion Yuan, up 4.25%, growth rate down 18.32%; main business income 363.9 billion Yuan, up 5.84%, growth rate down 15.81%.
Almost all of the four key indicators of industry operation quality show different degrees of decline. The industry debt paying ability fell, cash turnover slowed down, inventory increased, profitability declined, development pace slowed down. But it??s undeniable that China chemical fiber industry still boasts of a number of advantageous enterprises maintaining a rapid growth in such economic environment. In Jan-Nov 2008, according to the National Bureau of Statistics of China, the average profit rate of chemical fiber industry was only 0.93%, while 549 enterprises enjoyed a profit rate of 3.97% plus, accounting for 32% of the whole industry; their total profit amounted to 6.97 billion Yuan, twice of that of the entire industry.
Tab7. Operation Quality of China??s Chemical Fibers Industry (Jan-Nov, 2008)
Source: National Bureau of Statistics
3. Other Factors Causing Hardships for Chemical Fiber Industry
Besides the financial crisis, a lot of other factors collectively generate the current hardships for China chemical fiber industry, mainly including deeply rooted unreasonable internal structure of the industry and periodic industry operating rules.
The structural problem of chemical fiber industry still exists
Although China chemical fiber industry has achieved notable progress in reconstruction over the years, some of the deeply rooted problems still haven??t been fixed. In the context of global financial crisis quickly spreading over real economies, these problems and clashes have been further highlighted in terms of following aspects. First, a still low industry concentration; few international corporations, groups and industry leaders; little influence over the market; the industry will definitely get into chaos without powerful leaders when great changes take place.
Second, less capable of self-renovation mainly due to weak R&D investment. According to incomplete statistics, the R&D investment only accounts for about 1% of the sales income of China chemical fiber industry, much lower than 5-8% of Korea, far lower than 8-10% of US and 10-12% of Japan. Third, unreasonable industry capital structure and simple ownership structure of enterprises. At present, the production capacity of non-public chemical fiber enterprises accounts for about 70% of the whole industry, but ownership structure keeps quite simple, only a few enterprises of mixed ownership system. Fourth, industry development model keeps simple, serious overcapacity for homogeneous products. Although after entering the 21st century, newly increased production capacity of chemical fiber industry basically represents the advanced productivity, some problems are still left over such as homogeneous pattern of development, technology seriously lack of sustainable innovations and weak ability to extend in downstream industries.
Periodic operating rules exist in chemical fiber industry operations
The operating performance of China chemical fiber industry over 30 plus years has shown some intrinsic periodic rules. Periodic regulation is also necessary for the chemical fiber industry to deal with the current stress.
Fig.5 Growth Rate of China??s Total Industrial Value (1976-2008)
Source: China Textile Industry Year Book & China Textile Handbook
Periodic rules apparently exist in the operation of China chemical fiber industry. Since the 90??s of 20th century, chemical fiber and textile led by turns in production growth. Such interaction further promoted each other and speeded up the switchover of market supply and demand. Entering the 21st century, such switchover further accelerated which resulted in a 2-3 years shorter operating cycle. In 2008, China chemical fiber industry went through four periodic adjustments (global economy, China's economy, textile industry, chemical fiber industry) whose unprecedentedly simultaneous escalation in July put China's chemical fiber industry into even bigger trouble.
Source form China Textile Magazine
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Financial Crisis 2008 Impact on China Chemical Fiber Industry
Updated: 2009-9-3 Source: english.ctei.gov.cn
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