CPL's small uptick: a positive feedback from downstream to upstream

In the week beginning Oct 16, CPL prices have stabilized and showed a slight increase. The upward momentum is relatively moderate at the moment, but it looks temporarily sustainable.

The small rebound is understandable from the perspective of the industry chain. Last week, we presented two points (in the insight report "CPL & PA6 dragged not by demand but bearish outlook"):

1. Actual demand is not bad, while market expectation is weak.

2. Bright CS chip profits are gradually improving.

The stabilization of CPL prices since last week and the slight rebound this week are actually the result of these two factors. Along nylon industrial chain, only CPL producers are struggling with the processing margin. Previously, only its downstream bright conventional spinning (CS) chip plants suffered poor margin, which was a significant factor directly refining CPL price increase. However, there has been a noticeable improvement in bright CS chip profit after the National Day holiday. Therefore, from the perspective of industry chain profitability distribution, CPL actually has the conditions for price increases - as long as downstream can rise up at the same pace with CPL, they would not decline the opportunity to raise prices and sell products smoothly.

The actual consumption from downstream is not weak, which can be evidenced by nylon 6 chip and filament plants' operating rates.

After the National Day holiday, as nylon 6 high-speed spinning (HS) chip and textile filament plants needed to wait for Sinopec's contract pre-sales price until Friday (Oct 13), many HS chip and filament plants had maintained relatively high prices then. After Sinopec's contract price was announced, the other shoe fell and sales of HS chip and filament improved significantly. 

Nylon 6 CS chip downstream is also not bad. Represented by BOPA film, the price has been rising recently with the margin (represented by the price spread in below chart) has been improving significantly. Orders are sufficient and their purchase toward chip is relatively positive.

The risk of price decline has been fully released, while external factors, especially the expectation of rising oil prices due to the Israel-Palestine conflict, are starting to impact the industry's sentiment. Although oil-producing countries have not explicitly intervened in the conflict, tensions in the Middle East are high, and oil prices could skyrocket if the conflict escalates. Based on concerns about sudden increases in oil prices, the downstream purchasing sentiment in the industry has gradually shifted from a declining and stabilizing stance to an appropriately bullish outlook. As a result, a positive feedback loop has been formed from the bottom to the top of the market, allowing CPL prices to gradually recover.

Overall, the current industry environment is relatively healthy, and the slow pace of CPL price increase has a greater positive impact on downstream sectors. The gradual rise in raw material prices drives continuous and moderate recovery in transactions, which in turn increases the confidence of downstream purchasers in CPL. Additionally, with low inventories and high operating rates at various stages of the industry chain, the short-term positive feedback loop, driven from bottom to top, is expected to continue. It should be noted that if CPL prices rise too quickly at this time, leading to a consensus expectation of a bearish market in November, we may see a return of the cautious purchasing sentiment observed at the beginning of the month dominating the market once again.