Will CPL price decline significantly in July?

Starting from early June, CPL prices have risen against benzene price decline and the weakening demand for nylon 6 conventional spinning chip, and CPL production profit have been significantly restored.

CPL factories are inclined to sell more into the spot, since there are higher profits in various production methods based on merchant benzene, cyclohexanone, and phenol. The operation includes but is not limited to:

1. Reduce CS chip production and increase the volume of merchant CPL;

2. Purchase more cyclohexanone and expand CPL production;

3. Postpone the planned maintenance time for CPL.

However, due to the production cut from Risun, the increased CPL supply mentioned above has been offset. Therefore, in the week (Jun 19-25), the supply and demand contradiction in CPL in East China has eased, but the sellers have not yet felt sales pressure, and there is still some tightness in some factories' supply.

Due to poor demand performance and the downward pressure from benzene price decline, as well as the continued increase in CPL supply in the later period, downstream players mostly predict that CPL prices will fall back in July. Therefore, they have only purchased to meet their rigid demand still. In fact, CPL factories themselves agree with this view, so prices have seen a slight decline this week, with the transaction center gradually returning from the previous range of 12,200-12,300yuan/mt to between 12,000-12,100yuan/mt.

As far as the author can see, there are still some uncontrollable factors that need attention regarding whether CPL market will fall as expected in July.

1. Whether Luxi can restart CPL production smoothly in July, and at what time and operating rate, and whether its chip production will expand?

The current trend of CPL spot prices rising against the trend is closely related to shutdown of Luxi's CPL production and the increase in its merchant procurement for CPL. It has resulted in a reduced amount of CPL goods transported from North China to East China, which is a major factor in the price rise. Therefore, the strength and progress of the recovery of CPL production in Luxi in July are crucial factors affecting spot prices. Even if CPL restarts, will the remaining 150,000 tons of supporting chip capacity also restart? If so, it is not ruled out that Luxi will continue purchasing CPL in July. Therefore, in terms of this factor, we can only wait and see and cannot draw a conclusion.

2. There may be bottom-fishing procurement for HS chip

The other core factor besides the reduced CPL supply in East China in June that led to a strong supply-demand pattern for CPL is the high operating rate of the high-speed spinning (HS) chip market. As of the end of June, the operating rate of China domestic nylon filament has remained above 80%, which is very rare in the past years. Moreover, the volume of DTY has improved recently, and the operating rate has increased instead of decreasing, with the industry's average operating rate turning upward.

Based on the overall stability of production and sales, slow accumulation of inventories, and optimism about seasonal warming in August, mainstream filament factories are unlikely to implement production cuts in July. Even to the extent that July may be a low point in settlement prices based on the current estimate for the third quarter. Therefore, the performance of contracts and the amount of spot chip purchases are likely to remain at a high level. This also means that the support from HS chip market sector will remain strong for CPL.

3. The price and trend of benzene may not necessarily be consistent with the rhythm of CPL.

Currently, the balance suggests that the inventory of benzene will be reduced in July, and downstream styrene profits will recover. Therefore, the absolute price of benzene may rebound in July. In addition, from the perspective of the trend of bulk commodities, both indices and other highly correlated bulk goods have shown signs of bottoming out recently, and some have already rebounded after being over dropped.

Wenhua Price Index for Chemicals

PP futures Daily K-line

Although the rebound is weak, it also represents the recovery of market speculative sentiment. From the perspective of the nylon industry chain, as downstream inventories continue to be cleared and chip prices continue to stabilize, some capital is also considering building positions. There are many discussions about policies for the second half of the year in the macro market recently. Although the strength and effectiveness of these policies are mostly questionable, they also reflect a gradual change in the logic of the market's consensus of bearishness.

In conclusion, regarding the judgment of CPL prices in July, although there is a risk of price retreat in the short term, it is not advisable to be overly pessimistic from the perspective of the overall consideration of the third quarter.