Abnormal CPL processing fee in Feb

After the Chinese Lunar New Year holiday, various products in the nylon industry chain have more or less experienced price increases, which is consistent with our previous analysis. The core reasons include the strong prices of benzene, and the better performance of downstream sectors compared to previous years, especially the high operation rate of HS chip industry chain during the CNY holiday period.

Although prices have generally risen, there seems to be a somewhat abnormal amount of retracement in CPL processing fees in February.

As shown in the first chart, the price differences between spot CPL in East China and spot benzene in Shandong and East China respectively, which generally dropped to below 5500yuan/mt in February. Due to a retreat in East China benzene price after its strong start, CPL-East China price spread rose passively.

From the perspective of contract prices, the contraction of processing fees will be more pronounced. Sinopec had settled the Feb contract for benzene at 8,444yuan/mt, and for CPL at 14,245yuan/mt, and the price spread was only 5,801yuan/mt, down nearly 800yuan/mt around from 6,595yuan/mt in Jan. 

Generally speaking, the market is always right, and we attempt to understand the significant compression of processing fees from various perspectives.

Firstly, it was due to an improved supply in Jan-Feb. Since the beginning of 2024, with evidently improved processing fees, CPL plants' operating rate reached a peak. Following the restart of various units in January, the industry's operating rate gradually increased to around 95%. By the end of February, especially before the CNY holiday, it reached 99% (after capacity adjustments). High operation inevitably led to high supply, making CPL less tense than in December. Once downstream materials were stocked adequately, the previous premium caused by tight supply of CPL naturally got squeezed out.

Secondly, it was the impact of the CNY holiday. Due to the CNY holiday in February, negotiations on selling prices have been prolonged, and sellers made moderate concessions in pricing before or after the holiday to ensure downstream operations, stabilize prices, and boost post-holiday sales. However, due to excessive volatility in benzene prices, sellers inadvertently suffered losses, resulting in a noticeable contraction in its processing margin.

The above explanation is an attempt to interpret the situation of processing fee compression from a market-oriented perspective. However, as a seller, there are some issues to consider. Despite the considerations for sales and actual downstream conditions, the performance in February compared to January cannot be considered poor. Even with appropriately made concessions for the CNY holiday to stabilize prices, one may wonder if the cost is too high.

In terms of inventory, downstream production cut during the CNY holiday inevitably led to some increase in stock, but the increase was gradual, and absolute inventories remained relatively low.

Looking at processing fees of nylon 6 chips, whether it is CS chip or HS chip in February, spot processing fees have widened, performing better after the holiday. Sellers are also not compromising much on their operational rates. During the CNY holiday, slicing factories were almost fully operational, with operation rates gradually reaching 85% post-holiday.

In conclusion, the supply and demand of CPL were strong both upstream and downstream in February, but the post-holiday period played a trick, resulting in a nearly 800yuan/mt reduction in price difference.

Based on the current spot CPL-benzene price difference, which is around 5,000-5,500yuan/mt, it remains profitable for the best-performing companies in the industry, but for some companies with slightly higher production costs, they are already hovering near the break-even line. 

Another concerning issue is the significant drop in liquid ammonia prices after the holiday. For most CPL producers using synthetic ammonia, liquid ammonia and ammonium sulphate were previously profitable items but have now turned into loss-making components. Therefore, the tolerance for their current price differentials may weaken.

Given the above discussion, the author believes there is a possibility of some recovery in CPL processing fees in March. On this basis, if benzene settles in March contract at 8,800yuan or slightly higher, the monthly CPL settlement in March may experience a significant increase compared to February.