Recently, the biggest topic in the textile industry, and indeed the entire manufacturing industry, has been combating involution. This, in essence, means controlling production capacity, and this isn't the first time the textile industry has implemented capacity controls. What happened during the last round of capacity controls? Will this time be any different?
The last round of collective capacity controls in the textile industry took place in 2017. At that time, weaving capacity was largely concentrated in a few traditional textile clusters in the Yangtze River Delta. Distribution was highly fragmented, with numerous small workshops. Much of the wastewater generated by water-jet looms was discharged directly into rivers without treatment. Therefore, environmental protection was the primary reason for the water-jet loom regulations at the time. Following the water-jet loom regulations, starting in 2017, the number of looms in many areas of the Yangtze River Delta was reduced by tens of thousands. However, as weaving capacity decreased, loom capacity in peripheral regions grew rapidly. A popular saying at the time was that if 100,000 looms were removed from the Yangtze River Delta, 200,000 or 300,000 looms would be added in peripheral areas. From a price perspective, the capacity reduction of water-jet looms in traditional textile clusters starting in 2017 did create an artificial window of price increases in the grey fabric market. This window occurred in the first half of 2018, when grey fabric supply outstripped demand, sending fabric prices soaring. The following summer, we even saw PTA futures hit an unprecedented 8,000 points. Surprisingly, the polyester market at the time truly lived up to the old adage of "buy high, don't buy low." Weaving companies had just made a killing, and the higher the price of raw materials, the more they bought. But the booming market didn't last long, and the textile market subsequently deteriorated year by year.
The previous round of capacity controls in the weaving market ultimately led to industrial relocation and a chaotic situation. With the recent national campaign to combat internal competition, how will the situation develop this time? For one thing, the amount of weaving capacity that can actually be eliminated is relatively limited. The weaving market before 2017 was a gradual process that took shape over the decades following the reform and opening-up policy. Back then, capacity was paramount, and regulation was a secondary concern. However, 2017 marked a watershed year. Since then, both traditional and emerging production clusters have almost completely stopped allowing the previously uncontrolled growth of outdated production capacity to recur. Much of the newly added capacity has been relatively advanced. Furthermore, the past two years have been a peak period for water-jet loom replacements in the textile market. Driven by market competition and government guidance, a large number of older looms have been gradually replaced, leaving only a very limited amount of remaining old capacity. Therefore, from a capacity perspective alone, even with the loudest calls for anti-involution, the massive withdrawal of 100,000 looms, as seen in 2017, is virtually impossible. If large-scale capacity withdrawals are not possible, output can only be controlled by reducing loads. This summer's weaving machine utilization rate has essentially reached its lowest level in recent years, down 10-20% compared to the same period last year. This has indeed helped reduce inventory in the textile market to some extent. However, as market orders return, once these currently idled machines are fully operational, inventory will quickly accumulate again. The good news is that the rapid growth of textile production capacity over the past few years was largely due to very favorable policies in some regions, leading some weaving companies to open factories there simply to profit from the subsidies. However, as the country establishes a unified market, relevant policies are gradually tightening, and the subsequent slowdown in production capacity growth may alleviate the market's internal circulation to a certain extent. Postscript: During the last round of capacity withdrawal in 2017, the textile market experienced a few months of prosperity, but it quickly turned into a mess. China's textile industry no longer has the conditions for large-scale capacity withdrawal. Reversing internal circulation can only rely on consensus among textile companies.
