CPL lacks confidence in May, price declines significantly

CPL price declined continuously in mid-to-late May

At the beginning of May the accidental shutdown of Luxi's caprolactam plant caused a small rebound, then CPL price turned to a continuous decline. And due to Luxi's decision to continue production with part of nylon 6 chip production, CPL supply-demand pattern worsened and prices followed downstream nylon 6 chip.

Since late May, downstream had reached a consistence of bearish outlook and stayed wait-and-see. CPL decline accelerated. As of May 25, the price in East China has dropped to between 11,750-11,900yuan/mt.

Benzene bullish anticipation failed 

From the reasons, first, it is due to the decline in upstream benzene. After the Labor Day holiday (May 1-4), the logic of expected support from oil blending to benzene market was proven to be false, and benzene downstream industries had additional production cut for poor demand, and these directly affected the supply-demand balance of benzene. The previously anticipated large-scale destock has turned into rough balance or even slight inventory accumulation. Coupled with the impact of falling crude oil prices, benzene prices in East China have continued to decline.

CPL downstream demand goes downhill

Entering May, the downstream of nylon 6 CS chip has deteriorated. Quite a number of large modified plastic (MP) plants reflected unanticipated decline in May orders, and their operating rates were mostly going downhill. In fact, before the Labor Day holiday, some medium-small-sized MP plants already proclaimed perishing orders and lower run rates, but at that time, large MP plants' performance was relatively healthy. Hence, the orders in late Apr might were just structurally switched to more advantageous large MP plants. But as poorer sales spread to large plants since May, it has verified the downhill in rigid demand in the modified plastic industry. 

Another downstream consumption filed, nylon 6 HS chip, saw the rigid-demand consumption heading south month-on-month, though the reduction was not yet evident as plastics. In May, textile filament sector was weakening continuously. Medium-low-end POY and DTY demand was diminishing in May, as the represented Hai'an filament plants cut production largely. Large NFY plants in Zhejiang and Fujian maintained their run rates, while there were no additional orders. 

External, supply, and demand in bad scenario

As both upstream and downstream industries perform waned, CPL market was not ruled out. In addition, since mid-May, there have been a series of negative macro factors affecting the market, such as the US bank crisis, bond crisis, RMB depreciation pressure, geopolitical tensions, slow recovery in economy, deflation, weakening PMI, and more. Any negative development in the global economy can evoke the nerves of astute domestic traders, and prices can only go down.

From the current perspective, the downward risk of CPL at the price of 11,800yuan/mt is gradually being released. For the downstream buyers, this price is not considered high. However, from chip plants' perspective, their buyers have not purchased beyond rigid demand still, due to the lack of a foundation for rebound or expectations of economic recovery.

The systematic downturn of chemical products at the beginning of June is not a common occurrence. In previous years, at this time, the trading apparatus was still undergoing maintenance, consumption was picking up, and the operating rate was gradually increasing after the Spring Festival. However, this year, a series of factors have caused continuous decline in mid-May. Looking ahead to June and July, it is the off-season for demand, and this round of concentrated CPL maintenance is gradually ending. Therefore, neither from the perspective of CPL supply nor from downstream demand, there is no foundation for an increase in price.

The essential demand has already fallen back, and speculative demand has waned, which is the worst demand scenario. Moreover, there is no story on the supply side at the moment, which is indeed a headache at this stage.