CPL & nylon 6 market expect a transitional period

In the first half of May 2022, we have predicted the possible ceiling-breaking performance of caprolactam in the insight report “Caprolactam spot may exceed 15000 in May”, and the market performance and trading logic in the past two weeks are basically going according to our previous judgment. On May 24, as CPL market reached 14,900yuan/mt, a year-to-date highest rate in 2022, and a level close to previous prediction, we have also noticed that some indicators in the industry have changed, and we are going to review the performance of downstream chip market the status of nylon related end users in the past half month.

Despite of fast increased CPL prices, nylon 6 chip market has been faltering in May, with the weakness in conventional spinning (CS) chip more prominent.

Nylon 6 CS chip & downstream sectors

- Profit largely reduced in May

- Plant operations diverged

Profit largely reduced in May

In April, though the margin for nylon 6 CS chip weakened amid sluggish demand under the influence of the pandemic, CPL plants suffered deficits and thus shared part of the burden with downstream.

In May, continued firming benzene cost had exhausted CPL price elasticity, and CPL market was driven up. But there was no improvement from demand side, and nylon 6 CS chip margin was compressed significantly. CS chip plants are suffering losses in May.

Plant operations diverged

With CS chip profit compressed largely, the production cut is put on the agenda again. However, due to inconsistencies in customer structure, raw material CPL stocking level, and companies' views on the market outlook, For example, in the downstream of conventional spinning in May, staple fibers and fishing nets are better than modified ones, and South China is weaker than East China.

With CS chip profit compressed largely, the production cut is put on the agenda again. But due to the different customer structure and CPL stock, the implementation of the so-called production cut is not synchronized.

In terms of downstream application, the performance of staple fiber and fish net was better than modified plastics. Therefore, chip market in South China, focusing more on modified plastics, was weaker than East China. This has led to a big difference in the production and sales performance of mainstream bright CS chip plants.

In terms of CPL stocks, chip plants who had prepared larger number of CPL stocks in end-Apr or early May (before the price hike), have been running steadily. But chip producers who purchased conservatively in the early stage and chased up CPL market in May were under higher cost pressure and thus were more passive in adjusting their operations.

Nylon 6 HS chip & textile filament

- Pressure and divergence mainly on textile filament link

Pressure on textile filament link rather than HS chip

The same is true in the field of HS chip market, but the pressure and divergence are more reflected in downstream textile filament link.

The reason why the pressure of textile filed is reflected in filament link rather than HS chip link is that semi-dull HS chip had remained relatively tight supply during April-May.

Since 2021, dull HS chip production expanded, and many HS chip production lines had been switched to produce dull-grade ones, resulting in tighter supply of semi-dull HS chip. In April, HS chip plants started to switch back from dull-grade to semi-dull gradually, but the supply of semi-dull was not uplifted in short. In addition, Highsun had shut its semi-dull chip production in mid-Apr to early May and Jinjiang Technology planned maintenance in the third quarter, semi-dull HS chip supply has been further restricted. This is why semi-dull HS chip became the only one product stay immune in a general supply-inventory burden.

Divergence among textile filament plants

Similar to bright CS chip, there are divergence among different textile filament plants in terms of the intensity and rhythm about the production curtailment, as well as the space for price cut for promotion. It is mainly due to their different preparation of raw material stocks and capital flows, etc.

In April, part of filament plants had rising intention to cut down production due to lackluster demand under the impact of the pandemic. Their action was fast. Filament plants, represented by Nantong, Jiangsu province, had already cut operation in April.

But in Zhejiang and Fujian provinces, most plants, especially large-sized producers, maintained high operating rate still, as they had hoped to carry over this period and waited for the ease of the pandemic and recovery in downstream sales when feedstock prices increased. But through the observation in May, the effect was not good. Filament inventory continued building up. Under this burden, the new round of production cut among large-sized plants in Zhejiang and Fujian seems like the genie is out of the bottle-quite certain.

CPL, CS chip, textile filament market into a transitional period

To sum up, nylon 6 bright CS chip and textile filament plants may have a serious of adjustment in the near future. But their price cut or production curtailment strategies vary, based on the diverged late market outlooks, feedstock preparation and different downstream applications.

But there is no doubt that over time, the costs of raw materials for enterprises will gradually converge, and the previous advantages will gradually disappear. The current price levels are not sustainable for CPL, CS chip or textile filament enterprises, which also means that the market will soon give a new direction after a short transitional adjustment period.