Nylon filament yarn plants to cut operation under deeper split with upstream

In May 2022, as upstream CPL RMB spot chased up benzene cost actively, the price increased by 7.2% to 14,900yuan/mt by May 25, and nylon 6 HS chip prices also followed up with a month-to-date increase of 4.1% to 16,240yuan/mt. However, the lift in nylon 6 textile filaments is only around 1.5-3%.

With such gap in price movement, NFY plants are suffering increasing losses in the month. However, NFY plants' operating rate has been nailed at around 72.5% in May. Why are NFY plants struggling in holding the relatively high run rate under deficits?

CPL & nylon 6 chip market elevated smoothly in May

Since late April, benzene market kept strengthening continuously. CPL plant operating rate was below 70% in most time of the month and thus formed a balance between supply and demand. Due to heavy deficits, CPL plants actively raised their offers.

At the same time, nylon 6 semi-dull HS chip market was in tight balance and trading focused on contract, the spot offers for HS chip had lifted with CPL as well, and the increment was just a bit narrower than CPL. 

The supply and demand pattern was basically healthy for both CPL and nylon 6 chip market, thus the price increase had been relatively smooth. 

Textile filament price uptrend hindered by weak demand

Smooth increase from benzene to CPL and chip stopped in filament sector. With rising frequency of raw material price lift, nylon 6 textile filament plants also raised offers appropriately. But what waited for them was not the active follow-up of fabric mills, but disregard. Trading for textile filament was more difficult with downstream resistance enhanced. 

The May contract settlement for CPL jumped by 800yuan/mt month-on-month, and some specifications of nylon filament increased by 300-500yuan/mt or slightly more, but it was also common to see some other sources dropped 500-1,000yuan/mt even. DTY market suffered heaviest burden and the low-price competition was mostly seen. 

The price increase was blocked in the link of nylon textile filament, thus filament plants suffered heavily expanded losses in the month. 

Why NFY plants kept stable operation under heavy deficits?

Poor order taking of downstream fabric factories was the major hinder for NFY price increase. Even though the pandemic situation in China was improving as a whole, orders for textile and fabric links had not improve. Fabric price was still burdened down, and they were also suffering losses.

Take nylon fabric 380T as an example: the price of dull FDY20D/24F is currently at 27,000yuan/mt, and the price of fabric 380T has dropped to 2.6 yuan/meter (VAT included). Compared with the worst time in 2020, when FDY price was at 19,000yuan/mt, 380T was at 2.3 yuan/meter (VAT included). The losses of nylon fabric 380T has exceeded that in 2020)

With losses increasing, NFY inventory accumulated for 30-40 days or more. However, based on the following considerations, mainstream medium-large-sized manufacturers had not significantly reduced the production, and the average operating rate of filament plants in South China (Fujian and Guangdong mainly) was above 85%.

1. Lower production cost in spring: In 2022, the spring time has been extremely long in many places in Jiangsu, Zhejiang and Fujian, and the time entering summer has been delayed. So the electric bill for air-conditioning has been significantly lower than the same period of previous years. The production cost in summer time will be 150-300yuan/mt higher, and even 400-500yuan/mt higher for some fine-denier filaments. Furthermore, the higher operating rate also leads to lower average production cost. That is why even if the current sales is not smooth, NFY plants are still reluctant to reduce production, and try hard to hold on.

2. Expectations toward demand recovery after the pandemic: It has been nearly 2 months since end user’s demand was suppressed by the pandemic since the beginning of April. And in late May, the situation is getting evidently better, which gives hope to part of filament plants toward the demand recovery after the pandemic is put under control. 

3. To maintain and seize market share: When demand decreases, it is particularly important to maintain existing customer channels and even seize more market share if the enterprise want to stabilize high operating rate and let the output to be digested smoothly. It is precisely because of this that large-scale integrated enterprises take this opportunity to seize more market share by limiting price increase or even cutting prices when other sources lift in line with raw materials. 

The phenomenon is common at the higher or low-end market, which makes it more difficult for low-end DTY and FDY mills, who have been under inventory pressure due to weak demand for feather yarn, to release pressure and thus can only reduce their production. At present, most NFY mills in Nantong, Jiangsu have lowered their run rate to 4-50% or below.

4. Others: The reasons why medium and large-scale manufacturers are unwilling to cut run rate also include their effort of maintaining stable employment, cash flow, supply stability, and alleviation of pressure on raw materials.

However, the improvement of the pandemic situation is not reflected in the recovery of orders for fabric. NFY sales promotion have not achieved ideal effect. As Zhejiang and Fujian provinces are entering the summer time, the production cost for NFY is also rising. All of the above considerations are approaching the edge of nylon filament plants’ tolerance. If there is still no evident improvement in the end of May to early June, those who have been insisting operating at high rate will gradually cut down production, as the industry is entering a traditional off-season.