Nylon 66 market faces increasing real-time cost pressures

After the Chinese New Year holiday, the momentum of nylon 66 chip prices surged dramatically, with transactions becoming less important compared to the assertive momentum. From the perspective of downstream users, they are reluctant to purchase at higher prices as workers are not back at work after the holiday. However, from the perspective of the factories, the price increase is indeed justifiable for several reasons.

One of the main factors is the rise in costs. In February, the listing price of benzene continued to increase by 550yuan/mt. Taking into account the settlement period of Sinopec (from January 26 to February 25), the average listing price of benzene in February is expected to be around 8,500yuan/mt, an increase of 1,000yuan/mt from January. Therefore, it is estimated that the settlement price of adipic acid in February will be above 10,700yuan/mt, which is an increase of more than 600yuan/mt from January, placing significant cost pressure on polymerization factories.

Additionally, the cost pressure on HMDA is also relatively high, with the spot prices of butadiene increasing by 600yuan/mt, adipic acid by 250yuan/mt, and caprolactam by 280yuan/mt in February, leading to a high possibility of further price increases in March. By Feb 21, Invista Shanghai's Feb contract nomination was to 22,500yuan/mt, up 500yuan/mt month-on-month. Huafon and Ningxia Ruitai raised the Feb contract guidance price to 25,000yuan/mt, by cash, ex-works. Ascend raised the spot price for HMDA by $300/mt, and its offer to Chinese market was at 25,500yuan/mt, by cash, ex-works.

Therefore, from both the current reality and future expectations, cost increases are inevitable, and polymerization factories can only respond by raising prices accordingly. The continuous increase in the polymerization costs of adipic acid and HMDA-route since January has seen an average increase of 800yuan/mt in January and 600yuan/mt in February. Despite polymerization factories procuring lower-priced from AA spot to reduce costs, cost escalation remains unavoidable. (Note: The contract prices of adipic acid and HMDA for February are estimated values.)

Secondly, nylon 66 supply-demand structure before and after the CNY holiday was in tight balance due to reduced operations. Inventories in polymer factories are not high on average, but there are certain societal inventories (in traders, downstream plants and other links). Prior to the Chinese New Year, in consideration of inventory reduction, polymerization factories mainly focused on selling at a discount, despite cost increases in January, the actual chip prices were lagging behind. As a result, factories are facing difficulties in raising prices significantly after the holiday, with most factories having limited inventories and some in shortages in spot goods. Additionally, with the rise in actual costs, minimal price increases may result in losses. Finally, during the CNY holiday, polymerization factories have stabilized operations, as Jiangsu Huayang has resumed operations after maintenance as planned and are currently ramping up its run rate, while Tianchen Qixiang's polymerization unit has no immediate plans for resumption, and other factories are operating normally.

However, the smooth progress of price hikes still depends on downstream demand. Most modified plastic factories are expected to resume operations after the Lantern Festival (Feb 24), so the first wave of replenishment demand may be concentrated between Feb 25th and the end of the month. Currently, downstream users still have a considerable amount of pre-holiday inventory, making it challenging for short-term chip transaction prices to move higher.