CPL continues bottoming in Aug, after benzene collapses

Highlights of the article

At the end of July, although CPL was still on the weak side, but the downward momentum was slowing down compared to that period in mid to late July. But beginning August 2022, the decline in CPL market accelerated again, exceeding many people's expectations. As of last Friday (Aug 5), CPL RMB spot in East China fell to 12,450yuan/mt, and individual sourced with lower freight rates were even lower.

Viewing from the performance last week, the decline was first based on a lasting weak supply and demand pattern in CPL market. And more importantly, the collapse of benzene prices has prompted the meltdown of CPL market.

Core reason for a lasting weak trend in July

At present, the main suppliers of CPL spot are concentrated in North China, especially in Shandong province. The consumption power is mainly in East China, especially in Jiangsu, from nylon 6 conventional spinning chip plants.

From a micro point of view, CPL manufactories in Shandong are not contractualized and still rely on spot sales. Some time ago, due to the large and quick drop of spot prices, coupled with the weak polymer sales, polymer plants strictly held their restock for CPL. The original purchasing mode of polymer plant is one concentrated restock once a week, but now they purchase twice to three times a week, compressing the single purchase volume to a minimum.

The combination of such a procurement method of downstream buyers, and Shandong CPL suppliers' inventory controlling and more spot sales strategy, means a disaster for CPL prices. If there is no significant favorable to change the post-market expectations, the weakness of CPL will persist. This is the core factor of the weakness in July.

Direct reason for an accelerated decline in July

The direct factor for the accelerated drop in the CPL market in early August was the downward movement of benzene in East China. Previously, the overall high price of East China benzene was mainly supported by the extremely low port inventory and the continuous inversion of China-made and imported sources' prices. In July, benzene prices had already experienced a serious backwardation (with forward prices much lower than near-term or prompt prices), which reflected the tight prompt supply.

Entering August, increasing number of benzene downstream manufactories, who suffered excessive losses, shut down at a larger scale for maintenance. At the same time, overseas benzene prices fell significantly and imported goods began to enter China market, so market expectations changed remarkably. In early August, the premium in benzene prices supported by low port inventory factors was partly knocked off, and insiders began to wonder whether inventory accumulation would happen in market in August-September. So far, market participants hold low expectation toward demand recovery, and the possibility of accumulating inventory is dominant, which means that benzene prices are still likely to continue going downward.

CPL supply and demand situation is poor, and the industry fundamentals are in a weak state. Despite the collapse of benzene prices, the profit margin from the fall in raw materials is hardly all staying in the hands of CPL companies. Therefore, last week, CPL prices appeared to accelerate the decline. Looking forward, considering that this round of benzene price adjustment is not over, it is expected that CPL still has room to make up for the decline.