Views on caprolactam market trend in January 2021

On December 24th 2020, Sinopec settled the December contract for caprolactam at 11,700yuan/mt, up 1,050yuan/mt or 9.9% month-on-month. Many downstream users said that the settlement was too high. In fact, in comparison with CPL spot (11,750yuan/mt on Dec 24), the settlement was in line with market expectation, at least not too unreasonable.

Contract rise is also in line with CPL spot market movement and benzene contract settlement. Due to previous intensive plant maintenance, CPL supply had been very tight in the middle of the month and prices were soaring up high to 11,850yuan/mt, which was not acceptable for traditional nylon 6 chip makers. But some cord fabric plants had taken some orders at 11,800-11,900yuan/mt or above, as cord fabric market hiked on bullish demand. Rising spot market pushed up the natural average CPL spot rate in Dec and thus finally made settlement as high as 11,700yuan/mt. This rate was also in line with the increase in Sinopec’s benzene contract settlement for Dec, which rose 603yuan/mt or 15.6% month-on-month. The cost increase takes around 57.4% of CPL contract settlement increase.

Entering January 2021, insiders have a relatively consistent bearish view. Downstream demand is going to end before the end of the Chinese Lunar New Year, and CPL supply-demand pattern is tending to be loose in the coming days, while it is also hard for benzene to climb up further. Therefore, it is almost for sure that CPL price average will be weighted down in Jan 2021. The only difference is how much will it decline. This article of CCFGroup believes that a huge decline is less possible in Jan.

1. CPL supply-demand pattern
First of all, from the perspective of the supply and demand balance, CPL market had been destocked successfully in December given a shorter supply and strong demand, when nylon 6 chip plants maintained relatively high operating rate. Most CPL plants had cleaned out their tanks.

Furthermore, CPL stocks were low in downstream polymer plants. By end-Dec, CPL total stocks were evaluated at around 100kt, and the volume separated in chip plants were limited, excluding the small amount in CPL plants and a part in the form of flakes. The level, in comparison of the chip market (yearly capacity of 5.30 million tons), was low.

From January to February, considering the hidden dangers of freezing and smog, polymer plants would definitely store up liquid CPL in their tanks in advance to ensure a smooth production in winter. In addition, a considerable number of polymer factories are optimistic about the market trend in the second quarter of 2021, so they would prepare feedstock as much as possible when the absolute price of CPL is not high. All in all, downstream replenishment demand for CPL is relatively strong in Jan-Feb 2021.

Even when Shandong Haili and Lanhua Sci-tech has restarted their production, the replenishment should still be bullish, if the price have dropped to enough low. In addition, demand side is increasing at the same time with CPL supply. Weiming Petrochemical had put its 50kt/year chip plant into operation at the end of December, and Changde Haili plans to resume production in January after the acquisition. Shenyuan's upstream and downstream new capacities are basically synchronized, and it will cause limited influence to the market. Therefore, the increase in CPL supply and demand is basically synchronized, and it is difficult for CPL factories to build up inventories in January and February.

2. Benzene
Although the largest downstream sector styrene market had slumped since the end of 2020, benzene market was relatively steady. First, international benzene prices have been firm. As refineries’ operating rate was low in the U.S., benzene supply was kept tight and the high price kept South Korea-U.S. arbitrage window opened and more sources were attracted there. At the same time, trade flows to China reduced. Second, crude oil market had been relatively stable and it supported FOB S. Korea prices high. China benzene port inventory has been steady and China domestic suppliers thus kept their contract nomination high. If no significant decline appears for imported benzene spot, Sinopec’s benzene contract nomination may continue to peg high.

3. Market mentality
The current prevailing bearishness does not hinder downstream intention of restocking. The contract trading of nylon 6 HS chip in Dec has been steady. The execution of January contract still depends on downstream holiday arrangements around the Spring Festival (February 11)—whether they would continue operating at full capacity, or cut production or shut operation completely, and how long the reduced operation will last. And government policies are also important guidance to judge the situation. So far, there are no downstream buyers intending to cut down their contract purchasing in Jan.

Nylon 6 chip market has relatively larger pressure, as sales conditions have continued to be bleak for a period of time. However, according to CCFGroup’s plant survey, the chip inventory in downstream plants is at a low level, and their operating rate is still high. Similarly with CPL, it is just a matter of price, the lower the price, the stronger the demand for restocking.

Therefore, the recent downward correction and stagnated transaction is because that all parties are waiting for a relatively balanced price: a price at which CPL factories feel reasonable, polymer manufacturers can barely make a profit and sustain production and sales, and downstream sectors could accept to buy and sell.