Crude oil stands above the 100-yuan mark! Chemical fiber costs rise accordingly, and the exchange rate hits a four-year high, testing the resilience of textile exports.

Recently, international crude oil prices have risen rapidly, with Brent crude exceeding $107 per barrel and WTI crude simultaneously breaking through the $97 mark. Even without any sudden major geopolitical attacks, oil prices have still experienced a vertical surge. On the other hand, the renminbi has continued to strengthen, with both onshore and offshore RMB reaching their highest levels since July 2022.

Oil prices surged vertically, putting pressure on the cost of chemical fiber raw materials.

From the perspective of the crude oil market, the current round of oil price increases is primarily driven by geopolitical risk expectations, but the supporting role of fundamentals should not be overlooked either. On the supply side, OPEC continues to implement production cut policies, actively reducing crude oil supply and consolidating the bottom range of oil prices. In terms of inventories, global crude oil stocks have remained at relatively low levels for a long time, leaving the market with almost no sufficient buffer. Against the backdrop of weak inventories, once market risk sentiment rises, bullish capital can easily drive oil prices up rapidly, amplifying price volatility.

High oil prices create a top-down cost transmission chain. The textile industry chain is closely linked to crude oil, and major textile raw materials such as chemical fibers, polyester, and nylon all originate from petrochemicals. Rising oil prices directly increase the procurement costs of chemical fiber raw materials, dyes, and auxiliaries, transmitting upstream to the spinning and weaving processes, further squeezing the profit margins of printing and dyeing as well as garment manufacturing enterprises. At the same time, however, the significant strengthening of the RMB exchange rate partially offsets the dollar-denominated costs of imported raw materials, creating a unique pattern of ‘rising oil prices, exchange rate hedging,’ which is a particularly noteworthy current characteristic of the textile industry.

The Renminbi reaches a new stage high, benefiting imports and suppressing export profits

In contrast to the surge in crude oil, the renminbi has strengthened against the trend. Market data show that the onshore renminbi against the US dollar hit 6.6696 during intraday trading, while the offshore renminbi rose to 6.6688, both reaching new highs since July 2022, with a cumulative increase of approximately 4.6% so far this year. Market analysis generally believes that the strong trade surplus driving increased demand for currency conversion is the core factor behind the current appreciation of the renminbi. With resilient foreign trade exports, the scale of corporate conversion of foreign exchange receipts has increased, providing solid buying support for the renminbi.

The continuous appreciation of the RMB has led to changes in market expectations. Institutional views indicate that there is still the potential for the RMB to strengthen further, while under the domestic monetary policy framework, interest rates retain room for downward adjustment. A stronger exchange rate has a dual impact: for textile enterprises that need to import chemical fiber raw materials, high-end fabrics, and equipment components, the cost of purchasing materials in U.S. dollars is diluted, which can partially offset the pressure of rising international commodity prices; however, as many textile companies primarily rely on export orders, the appreciation of the RMB directly compresses the profit margins of exported products, sharply increasing the pressure on foreign trade textile enterprises in managing exchange rate risks.

Multiple factors at play make it difficult to predict a unilateral trend for crude oil and exchange rates.

The current combination of ‘high oil prices and a strong renminbi’ is the result of the joint effects of the global geopolitical landscape, the supply and demand of bulk commodities, and the fundamentals of domestic and foreign trade. Both major markets will continue to be full of uncertainties. In terms of crude oil, the evolution of geopolitical situations, OPEC policy adjustments, and changes in global inventories will all influence the future direction of oil prices, which in turn will affect the prices of synthetic fiber fabrics. On the exchange rate front, trade data, changes in the interest rate differential between China and the U.S., and global capital flows will all impact the renminbi’s movement, with two-way fluctuations remaining the overarching trend.