Caprolactam and nylon see a continued wrestle in May

Coming to the end of April 2021, nylon 6 upstream sectors, from caprolactam to nylon 6 polymer, are still under a complex of pressures, which hinder the market from a substantial break-through.

The above chart shows the price trends of CPL and nylon 6 conventional spinning (CS) chip in the past 8 months, and also the price spread between CPL and benzene. The former ones have seen continuous increase in January and February 2021, and reached a ceiling at March 8 (CPL) and February 26 (chip) respectively, and then entered near two months of consolidation. The latter one, CPL-benzene price spread, an indicator of CPL producers’ cash flow, has reduced at the same time with CPL price trend, while the decline was deeper as benzene cost hiked vigorously when CPL market was weak.

For the time being, caprolactam and nylon 6 chip market are still wrestling with high feedstock cost, mounting chip inventory and tepid buy mood.
- Caprolactam prices are forced up by hiked benzene cost.
- Inventory of nylon 6 polymer in all links mounts, transferring pressure to upstream CPL sector.
- Conservative market outlook makes it slow to move inventory downstream.

Benzene price likely to stay high in May on strong fundamentals
Benzene market is looking strong toward May. The arbitrage window from Asia to the U.S. gulf and European market remains widely opened, which means that the available sources to China main ports will be serious limited. And China domestic supply-demand structure studied by the website shows that benzene inventory in May will continue falling in May. Both import arrival and China domestic fundamentals show that benzene market will be further strengthened in May.

Based on current observation, the May contract settlement is expected to be largely higher than that in April, with a potential increase above 500yuan/mt or more. It is quite certain to result in higher settlement for caprolactam in the month.

High chip inventory transfers pressure upstream
Inventory of nylon 6 polymer in chip, downstream plants and traders has mounted over April, especially in conventional spinning chip plants, well over 20 days in late April.

Nylon 6 CS chip plants have been under apparent pressure in March-April 2021. Sales have been lackluster in most of the time since March, even the intensive restock spurred by hiking benzene market last week (Apr 19-23) was quite short lived, and chip inventory in CS chip plant alone remained above 20 days. And it is after CS chip plants put effort in cutting down operating rate from 85% to 65% over the past two months. It is very different from the situation in 2020, when CS chip inventory basically fluctuated at a low level within a week. The conservative replenishment of CS chip downstream buyers is mainly due to a less confident outlook, as last year’s supportive demand from anti-pandemic related materials and the government-boosted construction industry has both retreated. (The problem of nylon 6 CS chip in 2021 will be discussed in length in another article.)

Nylon 6 HS chip plants are less burdened, but their stock has also accumulated in April. It is mainly because that April contract trading of HS chip is not ideal. Nylon 6 textile filament plants have taken only minimum volume in the month as they consider the contract cost not favorable and May contract is likely to drop further. Nylon 6 HS chip plants are also planning to reduce run rate in May, and the effect and pressure on CPL market is still under estimation.

A more restricted consumption for CPL would be consequential, as the overall nylon 6 chip production activities drop down.

Demand tepid because of reluctant buyers
Rising chip inventory is a result of reducing demand, or more strictly speaking, downstream’s reluctant attitude to build raw material stocks. The reluctance comes simply after the bumpy market in previous months, when many plants and traders suffered huge losses because of the wrong time of restocking or selling. Buyers have turned much more cautious. It is further because of a largely bearish outlook toward May-June market. Before CPL and nylon 6 chip market shows clear sign of rebound, their buyers are not eager to purchase, particularly when chip stocks are mounting and the access to replenishment is so easy.

Even downstream players have seen the benzene boost, they believe the cost transferred to chip sector will be limited. They would rather bear the 200-300yuan/mt premium on prompt stocks, than taking the risk to be stuck of heavy stocks, which have caused them huge losses early in the year.

*The stock rate is an addition of the arithmetic means of all sectors, only to reflect nylon 6 downstream purchasing attitude.

The above charts shows the replenishment of nylon 6 chip in downstream sectors from filament mills to fish net plants by the end of March. The statistics by end-April are not fully collected, but the mid-month market survey indicates that the feedstock inventory will remain low or further decline toward the end of April.

CPL and nylon 6 chip market is still puzzled in May
Consider the supply and demand situation in both CPL and nylon 6 chip market, the hike in benzene cost will be hard for them to bear. But at least the 500yuan/mt increase in benzene Apr settlement will be transferred to CPL sector. And with CPL prices forced up gradually in May, nylon 6 chip plant operating rate will continue declining.　

However, it is more than a simple supply-demand problem when talk about CPL market development will be burdened by the cut of chip production. The contest between CPL spot and contract suppliers, their corresponding customers’ demand, and different time line of market reactions all puzzles CPL market. But one thing is clear to be explained that the production cut in semi-dull HS chip will not cause too much pressure on high-end CPL suppliers.