Profit evolvement of nylon 6 chips in 2022-2023

Different trading modes of HS chip and CS chip

Since the year of 2021, 80-90% of HS chip trading was through contract, and spot trading price was no more representative. The contract processing fee (based on CPL) for semi-dull HS chip was mainly at 1,100-1,200yuan/mt (a few 1,300yuan/mt) in 2020-2021, and 1,150-1,200yuan/mt (a few at 1,300yuan/mt or 1,100yuan/mt) in 2022. The processing fee from 2020 to 2022 was profitable for the HS chip plant. But plants purchase low-price spot CPL had more operation space and their profit was considerable. 

CS chip plants purchased contract CPL more as well as some spot CPL, and sold chips in spot market, their profit condition was in between of above two ways, bias contract. Some polymer plants actually purchased spot goods when the price was relatively low or got rebates in contract, and their actual profit was slightly better.

Profits in 2022 vs. in 2023, HS chip vs. CS chip

In 2022, the overall profits, based on both spot and contract CPL, of nylon 6 chip were evidently better than that of 2021. Due to the high nomination and low settlement of CPL contract in the first quarter, the profit of chip factory enlarged. But due to the pandemic in the second quarter, and raw materials were strong, chip factory was generally at a loss. With the sharp decline in raw materials in the third quarter, and the obvious widening gap between CPL spot and contract, the proportion of low-cost spot raw materials purchased by chip factories increased, and the benefits expanded. In the fourth quarter, the fluctuation of spot CPL was significantly larger than that of contract, and the polymer plant with a good procurement rhythm had made considerable profits. The polymer plants were generally profitable in 2022.

From the upstream and downstream perspective, the actual profit of nylon 6 chip plants in 2022 was largely based on the huge losses of CPL plants. However, after experiencing the significant losses in 2022, CPL plants' determination to limit production and support price in 2023 will be firmer. 

Trade term of CPL spot: 6 months BA, delivered     CPL contract: 6 months BA, ex-works

HS chip: 6 months BA, delivered       CS chip: by cash, ex-works

Considering the natural difference regarding their payment and delivery terms, the processing fees for HS chip with contract and spot CPL as raw material costs are 1150 and 1100yuan/mt respectively; for conventional spinning chip, the processing fees with contract and spot CPL as raw material costs are 550yuan/mt and 750yuan/mt respectively.

Since 2023, some CPL-nylon 6 integrated factories actively participated in CPL procurement, and as Luxi Chemical shut down its CPL production and resumed nylon 6 chip production after its explosion in May, the supply of CPL became tighter while nylon 6 chip, especially CS chip market, was in looser status. It had posed evident pressure on their profitability.

According to the performance in the first half of 2023, the mainstream contract settlement of CPL has been adjusted to a latter release (on every Friday) and high-frequency weekly pre-sale price to guide the monthly settlement, which greatly improves the predictability of monthly settlement. This approach reduces risk and adds certainty to the operation of chip plants. In addition, CPL contract weekly pre-sale price and monthly settlement are closely related to the average spot price, so spot purchase or contract purchase in 2023 may see a narrower gap at the cost end.

After the gap at the cost end narrows, profitability will be more determined by the performance of downstream market. In H1 2023, it is obvious that the textile situation (HS chip) is better than the non-textile market (CS chip), and the profitability of the textile-related semi-dull and dull-grade HS chips is obviously better than that of CS chips. This situation may run through the whole year.