Caprolactam finds some solid supports after a bullish start

Caprolactam spot price in China have been driven up sharply by over 1,000yuan/mt since the market reopened on Feb 18 after Chinese Lunar New Year holiday.

On Feb 18, Sinopec raised the February contract nomination for CPL by 500yuan/mt to 12,600yuan/mt; Fujian Shenyuan and Nanjing Fibrant raised the Feb nomination by 300yuan/mt to 12,700yuan/mt, liquid-grade products, 6 months payment, ex-works. The two adjustment came after the rise on Feb 8 (during the holiday), which marked a 400yuan/mt and a 500yuan/mt increase respectively.

In spot market, in the two trading days on Feb 18-19, CPL spot traded levels hiked up to 12,800yuan/mt in East China, up 1,100yuan/mt, from 11,700yuan/mt, the level before the holiday began, 6 months payment, delivered.

The gains in CPL market was in advance of actual demand recovery, and boosted by crude oil, energy and chemical market. Benzene had jumped up by 800yuan/mt in the start of the week, and cyclohexanone, a more direct feedstock of CPL, had increased by around 1,000yuan/mt. China caprolactam producers had no inventory pressure, as they kept delivering cargoes during the holiday, and thus raised up their contract nomination firmly.

Demand is not a direct cause of the increase, but CPL supply-demand fundamentals are being supportive.

As CPL plant operating rate reaches as high as 92% (it mainly keeps around 91% since Feb 5), nylon 6 polymer plants are running at an average rate of 80%. With total caprolactam capacity assessed at 4.48 million tons/year and nylon 6 polymer capacity at 5.326 million tons/year in China by the end of January 2021, the nylon 6 consumption still surpassed CPL production, considering other CPL consumption. This explains the slow decrease in CPL stocks, as a result of the tight balance.

What comes to the market after the good start?
There are still tons of uncertainties in investment sentiment, crude oil and energy complex, and these external influences could be strong enough to make reverse in the market. But there are also some points inside the industrial chain quite certain.

First, inventory in all links in nylon industrial chain has been relatively healthy, and no evident hurdles have been witnessed. Nylon 6 textile filament plants have maintained a historical high rate at 65% during the 2021 Chinese Lunar New Year holiday, the last highest rate was seen in the CNY holiday in 2013 at 72%. Medium-large-sized NFY plants mostly have kept high operating rate around 80-100%, and some smaller plants in Zhejiang and Jiangsu plants have been closed for holiday.

At meanwhile, NFY inventory has been controlled well over the holiday, as it has accumulated slowly by 1.5 days and is assessed at 19 days on Feb 19. The inventory after the CNY holiday has been tracked steady since 2018, but it was once high above 30 days in 2014-2016.

Inventory in nylon 6 polymer plants are also under control. By Feb 19, inventory of nylon 6 HS chip has accumulated by 3 during the holiday to 13 days, and that of CS chip plants has increased by 2 days to 7 days. This is a normal accumulation since transaction and delivery are both reduced during the holiday.

CPL downstream has been in a normal-to-healthy status, although demand is yet to recovery. The current price-driven system is trickling down from benzene to CPL, and to downstream polyamides. For downstream players, it is safer to keep tight close with the price change pace in raw materials, since risks of any bold speculative actions including large-quantity of pre-sales and replenishment are high when the market is very volatile. There is still uncertainty in the restart of nylon demand, and a clear and stabilizing feedstock cost is what downstream players expect most.

Comparing with the major feedstock cost, only CPL- benzene spread has been pulled up to a profit-making level, while for CPL producers who purchase phenol and cyclohexanone are still suffering below the break-even line. Moreover, other downstreams of phenol and cyclohexanone, including bisphenol A and PC, are showing strong momentum, which will boost up the feedstock price further, and finally drive up CPL prices. Of large possibility, mainstream CPL producers will adjust up their offering rate.

In CPL transaction, contract suppliers are taking a greater power in shaping market price rate, and at meantime, spot market is losing the decisive strength. The judgment and action of contract suppliers are increasingly important to the market. And a higher contract expectation will more probably result in an upward spot trend.