Unexpected weakening CPL after the Spring Festival

Logic changes in CPL market

In the last part of “January caprolactam market report”, we have forecasted that CPL market is likely to be firm in February 2022, as two major supportive factors are quoted: CPL stock may continue falling in February given the supply-demand pattern, and CPL plants are facing evident cost pressure from benzene, liquid ammonia, cyclohexanone, etc.

However, the situation has developed differently after a short bullish tick after the Spring Festival. The expected bullish trend did not last, as prices only jumped up on the first and second trading day after the holiday (Feb 7-8). Then market has started consolidation and then weakened since Feb 14.

We don't see the reason from CPL or nylon 6 production. CPL plant operating rate has waved down from 79% to 73%, lower than the average rate before the holiday. And nylon 6 chip plants have been running stably as well. With higher run rate in CPL plants and same rate in polymer plants, CPL inventory have been reducing during December 2021 until the end of January 2022. Apparently speaking, the supply and demand pattern in February 2022 should be still balanced. But the actual sales condition reflected from insiders is that CPL spot supply has been evidently longer. “Suddenly, there are CPL spot goods all over the nation”, said by an insider. 

Get to the bottom of this, we find the answer in CPL inventory structure. From December 2021 to end-January 2022, nylon 6 chip plants mostly held bullish outlook for CPL market, and they prepared extra amount of raw materials in advance. CPL stocks were smoothly delivered to downstream and there was no sales pressure. During February-March 2022, a lot more downstream plants have switched to a bearish sentiment, and they have stopped purchasing in advance, instead, they stand watching and wait for lower prices. CPL plants become passive when downstream stops booking stocks, and this would be more awkward for the liquid product like CPL, since the storage for liquid goods in each plant is limited! CPL plants are more eager to reduce stock before it reaches the limit, and thus the pressure boosts.

CPL inventory structures before and after the Spring Festival

*Not for quantitative description

Another important reason is a lower-than-expected benzene market performance after the holiday. One of the reasons why we are bullish on February before the holiday is the expectation of the rising cost. However, when crude oil price rose above $95/bbl, China domestic benzene market was dragged by its major downstream product styrene monomer, which was stagnant around 8,000yuan/mt.

In addition, the effects of cyclohexanone cost pressure was be fully reflected. Under the circumstance that the price difference between caprolactam and cyclohexanone has been narrowed to below 2,000yuan/mt (a seriously profit-losing level for CPL plants), CPL producers who need to outsource cyclohexanone are still running at high rate, and this is an unexpected confuse to the market.

The other bearish influence is from downstream nylon 6 chip market, since chip transaction after the holiday is not as good as expected. This factor will be discussed in detail in another article.

To sum up, CPL market fails to lead the nylon 6 industry up after the Spring Festival because of three major factors: lower-than-expected benzene market performance, weakening market expectation, and changed CPL inventory structure.