Nylon 6 filament yarn: searching a direction in anxiety

Since the first working day after the Chinese New Year holiday (CNY holiday), caprolactam spot had jumped up by around 2,400yuan/mt and nylon 6 high-speed spinning chip spot rose by 2,000yuan/mt in the first 10 trading days after holiday, boosted by the sharp rise in crude oil and bulk commodities, the opening of the year's rising market started ahead of schedule.

The excessive increase in nylon raw materials has quickly flooded the industrial, and nylon textile filament plants hurried to raise up their offers. By the end of Feb, offers for nylon 6 filament had risen by around 2,000yuan/mt, and offers had jumped by 2,500-3,000yuan/mt. As the March outlook is still bullish, NFY plants have stick their offering rates closely to Sinopec or Shenyuan’s contract nomination for CPL.

Fabric mills have not fully recovered, effective talks for NFY are slow.

Despite of the dramatic increase in nylon upstream market, weaving and knitting plants are slowly recovering their operation. Among the major fabric bases, only water jet looms have recovered run rate by over 60% by the end of Feb. Circular knitting, warp knitting looms and lace plants have just recovered by around 20-30%. In addition, fabric mills had mostly stocked up filament before the CNY holiday, thus their purchasing is only based on their stocks and rigid demand.

On the other hand, nylon filament plants are also controlling sales volume, as feedstock increase has exceeded their expectation and they need to control sales to prevent future losses. As a result, nylon filament turnover since the CNY holiday is limited.

Anxiety becomes a key word for NFY plants

The market is driven by overwhelming external influences including the commodity market, energy market, etc., rather than driven by fundamentals or I natural seasonal shift in the industry. But before the CNY holiday, nylon 6 filament plants had chosen different strategies according to their experiences, and thus have received totally different results in profit or losses.

1. The more backorders before the CNY holiday, the heavier losses suffered
Before holiday, as industrial players had expected the market to be in mild increase or even slight fall after the market reopening, many NFY plants had oversold their stocks. Some NFY plants had their backorders queued up to at least end-Feb, and some to mid-Mar, and even backorders were to the end of Mar or early Apr.

The backorders had been concluded based on pre-holiday CPL contract nomination (11,700yuan/mt), which was 900yuan/mt lower than the final settlement (12,600yuan/mt) on Feb 24, and 2,800yuan/mt lower than the Mar nomination updated on Mar 4. Sales in Feb alone have caused NFY plants losing 800-1,000yuan/mt, and the more backorders they took before the holiday, the larger the losses are.

2. The less feedstock prepared before the CNY holiday, the more regretful NFY plants are.

The above chart shows that nylon 6 POY 86Dtex and nylon 6 semi-dull HS chip price spread has lowered 350yuan/mt or 18.9% from Feb 25 to Mar 1, a time span across the CNY holiday. This means POY profit, based on the hand-to-mouth purchasing of HS chip spot, is 350yuan/mt lower than the pre-holiday level. According to market survey, most POY plants are under deficits.

In late Jan to early Feb, most NFY plants had no intension to replenish large number of HS chip, which had been in a flat trend sufficient supply. Right before the CNY holiday, nylon 6 HS chip prices gradually elevated in line with CPL spot, but most HS chips are ordained to contract buyers, and spot supply was rather limited. NFY plants were willing to replenish at this time, but could not secure much feedstock from the spot, and only acquired the monthly contracted volume to the up limit.

According to plant survey, only some small-scale and very few medium-scale NFY plants had prepared 1-2 months feedstock, while most large-scale NFY plants are now under immense cost pressure.

3. NFY plants to find a right direction in the anxiety
Under the global inflation, market players have become less certain on their judgment of market ceiling price. The development is out of the fundamentals. For nylon 6 textile filament plants, the upmost task in Mar is to control the risks of losses and risks of high-cost inventory accumulation.

The sustainability of this round of quick rise is still uncertain, but most players expect price to continue to be high in short. NFY plants should adjust the expectation of CPL contract settlement for Mar and adjust NFY prices accordingly. NFY plants with relatively low feedstock inventory are suggested to consider taking controlled volume of orders and restock spot-based raw materials according to demand in early March, thus balance the losses caused by rising contract cost in Feb.