Inside China's Fiber Industry: Why the Capacity Overhang?

From 2001-2008, China’s polyester output expanded at an annual rate of 18.8% buoyed by its thriving textile and apparel sector. Over the same period, China’s consumption for textile raw materials, specifically polyester fiber, increased at an annual rate of 10%. In 2008, China’s polyester output and use accounted for over 50% of global production and consumption. The large capacity additions in China coincided with high crude oil prices. From 2001 until the third quarter of 2008, sustained increases in the price of crude oil and petrochemicals resulted in higher raw materials costs. Excess capacity led to fierce competition and tempered the rise in polyester prices, shrinking producers’ profit margins (Walker, 2008). Notwithstanding lower profits and numerous plant closures, China’s output of polyester fiber continued to grow, although at a slower pace, while China’s counterpart producers have reduced their polyester output in recent years. The objective of this paper is to characterize the production structure of China’s polyester fiber industry and in so doing explain the industry’s resilience to rising petrochemical prices, excess capacities, and diminishing profits in recent years.