Asian factories face a "cold wave" of shutdowns: textiles and packaging industries hit hardest!

Ask AI · Does India’s production cut signal a broader economic ripple effect?

China Finance Network (Caixin) April 8 News (Edited by Xiaoxiang) For weeks, industry insiders have been analyzing how the Gulf Energy impact could trigger a chain reaction: the shockwave spreads outward from the Middle East, first hitting Asia, tightening the supply of energy products, which could lead to global economic turmoil. Now, this chain reaction of tightened energy supply has become evident in factories and workshop floors across Asia, causing growing concern.

Goldman Sachs analyst Georgina Fraser’s team warned clients on Monday that the petrochemical shock in Asia is intensifying, with textile and packaging factories among the first downstream businesses to be badly hit.

In her report, Fraser emphasized that “both the speed at which the supply shock spreads and the extent of its impact are beyond our expectations.”

She said the supply shock has spread from rising energy prices to production cuts, margin compression, and demand tapering off earlier than expected, adding: “Relevant signals are emerging rapidly, and the textile and packaging industries are the first downstream sectors to be affected.”

Last week, disruptions in the supply chain for key plastic feedstocks began to show up, and several monoethylene glycol (MEG) and purified terephthalic acid (PTA) producers announced force majeure. These feedstocks are indispensable for plastic production, and plastics are a core material of the modern economy.

Fraser noted that since the outbreak of the U.S.-Iran conflict, spot prices for PTA have surged by more than 30%.

China’s PTA supply chain accounts for three-quarters of global PTA capacity. Due to shutdowns and production cuts, about 15% of China’s PTA capacity (about 11% of global capacity) has been affected.

It needs to be explained that MEG and PTA are the two main raw materials used to produce polyethylene terephthalate (PET) and polyester fiber. These petrochemical products are crucial to producing everyday consumer goods. They help make life in different countries more convenient, including plastic bottles, food packaging, clothing, household goods, and a wide range of consumer products and industrial goods.

Fraser then turned her attention to India. She pointed out that the country has shown initial signs of a petrochemical supply shock: in Surat, the main synthetic textile hub in India, producers have cut production down to a single 12-hour shift—cutting output in half—due to the double blow of soaring plastic costs and weak demand.

She said that in the apparel and textile sector, petrochemical-related inputs account for 50% to 65% of sales costs, and recent volatility in the spot prices of raw materials implies a 17% hit to sales costs, which is enough to cause less efficient factories to suspend operations.

The packaging industry faces risks as well. Even though demand for non-essential goods is lower than for apparel, pricing pressure for PTA and related petrochemical products remains elevated, which could spill over into food, beverage, and consumer-goods packaging and increase the likelihood of inflation transmission.

In fact, this scene inevitably calls to mind JPMorgan Chase’s commodity strategist’s prediction last month about the “domino effect” of an energy shock: Asia comes first (already underway), followed by Africa and Europe, and finally reaching the United States.

“Even if the conflict ends in the future, it cannot completely eliminate the supply chain disruptions that have already begun,” Fraser warned.

(China Finance Network Xiaoxiang)