Is CPL adjustment turning into a new low?

This week (Dec 16-20), CPL market has undergone dramatic changes. As of Dec 19, the delivered price in East China has dropped to 10,600yuan/mt, approaching the lowest price since November. In terms of transaction volume, due to the sharp price decline, most downstream players are cautious about taking delivery. The prevailing mindset is to wait until next week, so unless something unexpected happens, it is highly likely that the price will hit 10,500yuan/mt next week.

Over the past month, the main logic of CPL market has revolved around three key points:

A. The continuous release of new capacities in downstream

B. The need to correct the previously low CPL processing fees

C. Steady demand from downstream

We have remained optimistic about the supply-demand relationship for CPL in the future, but we also emphasized that, due to inventory at various downstream sectors, the continuous price push has encountered resistance, making it inevitable for prices to face consolidation. However, why did prices suddenly collapse?

From the outcome, the entire industry is suffering. CPL is no exception, with processing fees hitting new lows. Prices have returned to November's lows, while benzene has increased by 500yuan/mt in December. Whether calculated based on East China benzene or Shandong benzene, processing fees have reached new lows.

If benzene is bought from local refineries, with prices arriving at 7,700-7,750yuan/mt, and CPL in East China calculated at 10,600yuan/mt (delivered), the price difference is 2,900yuan/mt. After deducting transportation costs and interest, the pure processing fee is around 2,500yuan/mt. This level is similar to that of dull-grade nylon 6 chips in previous years. The situation for purchasing cyclohexanone as raw material is even worse, with processing fees plunging into the abyss, even worse than that in 2017-2018, when the prices of cyclohexanone peaked.

Are downstream players benefiting? Since the beginning of this week, chip prices in the north have been falling continuously, and although chip manufacturers in East China have set prices above 12,000yuan/mt, transactions are poor. It is reasonable to require profits from upstream, but suppressing CPL prices is not the intention. Raw material inventories are still there, and if they are pushing upstream factories too hard, they could shut production, which is of downstream unwillingness to see, especially since chips currently have profits.

From an overall supply-demand perspective, since December, Yuhua New Materials' first nylon 6 chip line of 70,000 tons has been put into production, and the second line will start feeding soon. Shenma Puli's first new line has already reached full capacity, and the second set of 70,000 tons started feeding Dec 17, currently operating at 70% capacity. Overall, it is clear that December is definitely in a destocking pattern for CPL, without any dispute. However, the key is that there is a process involved, and there are issues with inventory structure. Generally speaking, CPL inventory is currently more concentrated among buyers rather than sellers, and more concentrated in the north than in the south, which introduces instability. This may be the main reason for this round of unexpected price declines. Here's an example to illustrate:

For instance, if five factories, a, b, c, d, and e, each have 10,000 tons of inventory, totaling 50,000 tons, and factories a and b have their inventories depleted due to plant maintenance and downstream capacity release, the total inventory would drop to 45,000 tons. Now, c, d, and e would each have an average of 15,000 tons of inventory. For some factories, this extra 500 tons of inventory could be detrimental.

Another example: if the original total inventory was shared equally among upstream A, B, and downstream a, b, each having 10,000 tons, and now the price has retracted, with downstream consumption dominating inventory, total inventory may drop to 35,000 tons, but A and B could each rise to 12,000 tons, while downstream a and b could each drop to 5,500 tons.

Therefore, when the inventory structure is problematic, it is inevitable that some CPL factories will face selling pressure. CPL is a highly planned product, and the sales channels for each factory are generally fixed, with quantity being determined but not the price. During a downturn, heavy selling is likely to impact overall market prices, leading others in the industry to be confused, and it is inevitable for downstream to follow the decline. In most cases, the price of CPL is determined by the weakest link in the market.

The above attempts to explain the unexpected decline in CPL prices from the perspective of inventory structure. Ultimately, CPL factories have been running at full high rate. With less supply, there would not be so many potential hidden risks emerging.

From the current situation, the rapid price decline may quickly reach a bottom. At the current rate, prices may stabilize next week, but it is difficult to judge the absolute price at this moment. Chip manufacturers have been reducing purchases since last week, and this week remains the same, while the operating rate of nylon 6 remains high overall. Against the backdrop of increasing probabilities of production cuts and shutdowns among suppliers, a decrease in raw material reserves next week will inevitably lead to concentrated replenishment.

Finally, it should be emphasized again that downstream demand for nylon 6 is not weak. From both the price difference and inventory perspectives, the overall operational indicators of the chip industry show good performance. While there may be discussions about production cuts during the holiday season, it is still far from the time to make decisions.