CPL & PA6 dragged not by demand but bearish outlook

Since the end of the National Day holiday, caprolactam and nylon 6 chip market have extended a declining trend, as crude oil market has deeply tumbled in the holiday and China domestic benzene prices traced downward afterwards. By Oct 9, CPL prices in the East China fell to 12,400-12,500yuan/mt, 6 months BA, delivered to East China, and bright conventional spinning chip prices fell to 13,300-13,400yuan/mt, by cash, delivered. During Oct 9-12, market entered into a consolidation.

Supply increase is less than expected

We had a bearish view on the post-national day market before the holiday, mainly considering the pressure on the supply side. It was understood that many CPL factories still had inventory by end-Sep due to cautious restocking by downstream markets. Therefore, there will be a strong demand for liquidating stocks after the holiday. More importantly, considering the incremental supply from Hunan Petrochemical (300kt/year) and Shenyuan (200kt/year), and Tianchen Yaolong's restart of its 350kt/year plant, CPL prices are unlikely to rise after the holiday under the negative impact of increased supply.

It is easy to understand that CPL factories would mainly focus on reducing inventory after the holiday, combined with the drop in oil prices during the holiday, CPL price development will be downward still.

Actual demand (consumption) not bad

Although prices have declined, downstream buyers for CPL, chip, and filament are mostly adopting a cautious approach after the holiday, but this caution is more due to the price outlook rather than a weak rigid demand. In other words, the operating rates of mid-to-low-end users remain relatively high compared to that before the holiday. However, the purchasing mindset is influenced by the impact of oil and benzene, and some filament factories still maintain relatively high offers due to unclear contract prices (to be determined on each Friday). It should be noted that this caution is different from a complete lack of orders from the sales side.

Difficult to reverse the weak expectations

Furthermore, another major factor suppressing current transactions is the lack of obvious potential for sustained upward movement. Fundamentally, nylon industry is currently in ample supply and relatively good demand. However, considering the upcoming operation of new facilities (Shenyuan and Hunan Petrochemical), it is highly probable that the increase in supply will surpass the increase in demand in the next stage. In other words, looking towards the end of October and November, the supply-demand relationship may gradually transition from a balance to a situation where supply outweighs demand. From this perspective, although post-holiday prices have declined to relatively low levels, it seems unlikely to attract downstream buyers to replenish stocks intensively. Therefore, even if prices were to experience a rebound due to overselling, the upside potential currently appears limited.

Possible variables

1. Whether the price of benzene will continue to strengthen. It has been emphasized multiple times before that the supply and demand pattern for benzene is not weak, and the core reason for its post-holiday decline is the fall in crude oil prices. After the initial decline, there has been a rebound soon afterwards, and as of Oct 9, benzene spot prices at ports have recovered to 7,900-8,000yuan/mt. The supply and demand for pure benzene in October is not poor and may even be partially tight. If spot prices continue to rebound and listed prices are adjusted upward, it is possible to drive a sustained recovery and rebound in CPL prices.

2. Whether there will be new production cut plans amid CPL plants under cost pressures. Currently, benzene prices are strong, hydrogen peroxide is gradually retreating from sky-high levels but still relatively high, and coal prices have been on the rise recently. A considerable number of CPL factories are operating at a loss given the current spread between benzene and caprolactam prices. If CPL prices fail to stop their decline and rebound to the cash flow breakeven line, it cannot be ruled out that new production cut plans may be introduced.