On July 6, a new round of promotions by polyester plants pushed the average sales-to-production ratio of polyester filament yarn sample companies to 153.8%, with downstream users making moderate replenishments and local markets finally showing signs of recovery. Behind this seemingly bustling turnover, however, lies a complex situation where falling international oil prices have triggered aggressive price-cutting demands from customers. For many textile companies, the decision to produce or cut production has become a gamble on the second-half market outlook.
Upstream-Downstream Profit Tug-of-War
The polyester plants' promotions are not genuine price cuts but limited concessions to test the market. The underlying logic is clear: when operating at 70% capacity, profits remain sustainable, but if prices are slashed to boost volume, margins could shrink to one-fifth of their original level. More critically, current inventory of polyester filament yarn was produced using high-cost raw materials, making actual costs much higher than book values. These stocks can only be digested slowly and cannot be rushed.
Upstream players have tasted the benefits of 'anti-involution' efforts in recent years and prefer to maintain low operating rates and defend price floors rather than return to the price war quagmire where 'the more you sell, the more you lose.' While this strategy preserves profits, it exacerbates the standoff with downstream players.
Downstream weaving companies are equally cautious in responding to promotions. When polyester yarn prices drop, customers generally expect further declines and continue to wait and see. The previous promotion achieved only a 70% sales-to-production ratio, reflecting fragile market confidence. Once prices loosen, it reinforces the waiting mentality. Customers cite falling crude oil prices to demand 'proportional price cuts' for fabrics, but the upstream's conservative promotional strategy makes such demands difficult to fulfill.
Traditional Stocking Season Meets Capacity Contraction
Early July is traditionally the time to stock up for autumn and winter fabrics in the second half of the year, but this year is different. Last year, production halts were severe because factories had run at full capacity in the first half, leading to inventory overhangs that forced cuts. This year, the situation is different: weaving companies have been traumatized by cost volatility. With raw material prices swinging wildly, no one dares to increase capacity lightly.
Deciding how much capacity to run has become a gamble for many weaving companies: betting on whether the products they make will suddenly become hot in the second half. The optimistic scenario is that demand recovers in H2, fabric prices rebound in a low-inventory environment, and inventory turns into a 'hot commodity.' The pessimistic scenario is that fabric prices remain flat or fall further, and the more you produce now, the bigger the loss in H2.
The market is currently in its slowest season of the year, with relatively few orders. However, textile companies cannot completely ignore preparations for the second half. This dilemma has led to generally low capacity utilization across the industry, with the supply chain holding relatively low inventories.
Outlook for the Second Half
The market direction depends on several key variables:
- Demand: Whether autumn-winter fabric orders materialize in August-September as expected
- Costs: Whether international oil prices stabilize after US-Iran negotiations
- Inventory: The pace at which polyester plants digest their high-cost stocks
If demand recovers alongside low inventories, it could trigger a restocking wave, temporarily lifting fabric prices. But if demand remains weak, the current low operating rate may actually serve as a 'safety cushion' for the industry, preventing massive inventory buildup.
For buyers, this is a time for observation, not action. For mills, maintaining flexible capacity and controlling raw material inventory cycles is safer than betting on a single direction.