CPL: not yet to cut production to maintain price

In mid-June, CPL-benzene price spread has dropped to an astonishing low level of less than 3,500yuan/mt. It is important to note that CPL price includes shipping costs to East China, while benzene is ex-tank East China, meaning that after deducting transportation costs at both ends, the actual processing fee for CPL is below 3,000yuan/mt.

Although CPL spot processing fee is approaching a historical low, most CPL facilities are still operating at full capacity, except for one, Lunan Chemical in Shandong, whose maintenance plan has been repeatedly delayed. Currently, there are no planned shutdowns except for very few short-term production cuts. As of Jun 20, the operating rate for CPL industry stands at 100%.

In recent years, with the continuous growth and development of nylon markets, CPL enterprises have gained confidence and are committed to further developing the industry. Thus, various units have taken several measures to address deficiencies, reduce costs, and improve efficiency, including but not limited to:

1. Combine heat and power generation

2. Integrate with cyclohexanone (hydroxy ketone, phenolic ketone, esterification ketone), and hydrogen peroxide production

3. Integrate with gasification facility, self-produced hydrogen and liquid ammonia

4. Scale up and integrate with polymerization

5. Optimize customer structure, reduce sales radius

6. End depreciation for some facilities

7. External procurement of alkanes (oxidative method), ketones, and export of ammonium sulfate

In terms of configuration, all enterprises seem capable, with their gap narrowing. The differences mainly lie in algorithmic discrepancies, such as whether profits are calculated for the entire production chain in an industrial park or individual product. However, from the perspective of operational decisions, the focus is on overall benefits and maintaining material balance at the industrial park, even if calculating losses for a single product may not lead to production cuts easily.

In this round of particular "price war," the unusually high operating rates stand out. Apart from the long-term shutdown of Inner Mongolia Kingho, most CPL facilities are running almost at full capacity or over capacity even. Even including the previously excluded facilities such as Haili, Sinopec Shijiazhuang Refinery, and Sinopec Baling's old facilities, the overall operating rate is close to 90%.

Taking a perspective that what exists is rational, let's look for the favorable factors for short-term CPL operation:

1. Chip demand is high, and CPL production rarely accumulates excessive inventory. For CPL factories, there is a steady demand for their products, making it challenging for factories to reduce production due to both psychological reasons and the separation of production and sales management styles, which is crucial.

2. On average within the industry, the current focus is on maintaining margins or cash flows, with full costs already making concessions.

3. Prices of cyclohexane and cyclohexanone still have a gap with CPL. Current prices are about 1,000yuan/mt higher than the lowest levels in the past. This contributes positively, especially with cyclohexane prices around 8,300yuan/mt, more than 1,000yuan/mt lower than benzene.

4. Ammonium sulfate profit subsidizes CPL. Recently, ammonium sulfate prices have seen significant increases, surpassing the 1,000yuan/mt mark in June. Calculating on a per unit basis, the positive contribution has significantly expanded.

5. Running at overcapacity helps to dilute the cost per ton of CPL.

If all the conditions mentioned above are met, CPL factories should have no issues in maintaining marginal benefits at present, indicating that despite the surprising conclusions, production constraints to maintain prices may indeed need further consideration.