How Can Synthetic Fiber Producers Digest Cost Pressure

The oil price keeps on the rise and the market pressure on
synthetic fibers is increased

Since the second quarter of 2006 the oil price has reached more
than US$70 per barrel. The price of Brent oil today is around
2.3 times the price at the beginning of 2003. The skyrocketing
oil price rise has led to a rising trend in the price of synthetic
fiber raw materials. The price rise of upstream raw materials
has increased the cost in synthetic fiber producers and squeezed
their profit margin.
   The situation of production and sales in the textile industry
as the synthetic fiber downstream sector has been quite good in
recent years. Both the industrial output value and the total
profit in the textile industry have had an average annual growth
of around 25% and the demand of synthetic fiber has increased
rapidly. Nevertheless, in international environment with a
constant increase of the oil price and the raw material price,
synthetic fiber producers are faced with increasing cost
pressure.
   Besides, the market supply and demand is not very optimistic
in recent years. The capacity growth of polyester and synthetic
fibers is much higher than the demand growth. The market
competition is therefore aggravated and the operating rate of
production units in synthetic fiber producers is reduced.
   As the price fluctuation margin of downstream textiles is
relatively small, the bearing ability of textile firms is quite
limited. It is therefore difficult for synthetic fiber producers
to shift the additional cost through the price rise of their
products. The profit of synthetic fibers was squeezed again and
again. Polyester and polyester fiber have always been in a state
of thin profit.

How will the oil price affect the
market of synthetic fibers and their raw materials in future?

In terms of future development, the possibility is quite big for
the crude oil price in the international market to be maintained
at a high level. The oil price will continue to give a support
to the price of downstream petrochemical products. The price of
synthetic fiber raw materials will likely increase constantly,
producing a lasting pressure on synthetic fiber producers.
   In the next few years, however, the capacity of petrochemical
products with ethylene as the representative will increase
remarkably in both domestic and overseas markets. Such capacity
growth will also include partial synthetic fiber raw materials.
The supply deficit of synthetic fiber raw materials will
therefore be partially eased.
    With the completion of new units, the operating rate of
production units in petrochemical companies in the world will
have a reduction. At the same time the self-sufficiency rate of
synthetic fiber monomers in China will also increase constantly
and the market competition will be aggravated. The price of
synthetic fiber monomers can hardly be maintained firm for long.
It will even become soft in some periods. Due to the high oil
price, the petrochemical sector will suffer greater pressure.
The low-profit status in the synthetic fiber sector may
gradually be shifted from synthetic fibers to synthetic fiber
raw materials.
   In case the oil price is maintained at a high level for long,
the high cost can hardly be absorbed by synthetic fiber producers
themselves or shifted downstream. The synthetic fiber sector
will therefore be faced with lasting cost pressure. Besides, the
unduly high oil price will stimulate the development of other
fiber varieties not based on oil resources such as cellulose
fiber, bamboo fiber and polylactic acid fiber.
   The impact from the oil price on synthetic fibers will be
slightly weaker than the impact on upstream petrochemical
products in the next few years. (a) In the industrial chain from
crude oil to synthetic fibers there are quite a few links in
between such as naphtha, olefins, aromatics and synthetic fiber
monomers. The impact of the price factors will be gradually
weakened. (b) Because of the poor benefits in recent years, the
growth of polyester and polyester fiber will be slowed down to
be equal to or even lower than the demand growth. The operating
rate of production units in polyester producers will therefore
have a pickup in the next 2 or 3 years and the supply deficit
will be partially eased.

How should synthetic fiber producers cope with the high oil
price?

Efforts should be made to promote technical progress and
increase product added value. The competitive edge of synthetic
fibers is mainly embodied in the development and innovation of
new products. Some synthetic fiber producers in China have
already acquired certain technology and ability for product
development, but there is still a considerable gap compared with
the world advanced level. Large foreign companies have enlarged
their investments in setting up production units in China and
the market competition in China has become fiercer. If synthetic
fiber producers intend to improve their profit-earning ability
and increase their market shares, they must change the
low-profit status based on conventional products, shift from
quantity growth to technology and performance growth and develop
and promote new products with market potential and high added
value such as products for non-fiber uses, fibers for industrial
uses and fibers with special functions. Only in this way can
synthetic fiber producers maintain their profit-earning ability
at a time of high raw material cost.
   In a scenario of high oil price and energy deficit, synthetic
fiber sector should vigorously develop cyclic economy and energy
conservation technologies such as technology for the cyclic
utilization of waste materials, waste liquids and recycled
materials. Foreign companies have developed the technology for
the chemical recycle of polyester to convert polyester scraps
into monomers for reuse in polymerization. China is a large
polyester producer but lacks energy. Domestic producers and
research organizations should strengthen research and
development on the recycle and especially the chemical recycle
of polyester.
   In terms of overall development, the upstream and downstream
industrial chains should have a coordinated development to avoid
the blind and unduly rapid development of some products. Inputs
should however be made in the capacity expansion of products with
belated development. The coordinated development of industrial
chains will help cope with risks from the high oil price and
mitigate possible impacts on some products.
   Synthetic fiber producers should further expand both
domestic and overseas markets. China is a large country for the
production, consumption and export of textiles. The consumption
of textiles and clothes for a population of 1.3 billion is huge.
China is also the largest exporter of textiles in the world and
already holds a 24% share in the international market. The
consumption of synthetic fibers as major textile raw materials
will maintain relatively high growth in both domestic and
overseas markets for long years. With the constant improvement
of people's living standards, major import countries and regions
may take various trade protection measures. The mode based on
the production, consumption and export of low-grade textiles
with low added value must be chan