Downward revise in nylon industry may be prolonged by crude oil slump

Crude oil futures retreat as bond yield spike spooks global markets

On Mar 19 2021, crude oil price saw worst single-day slump with WTI April futures closed $4.60/bbl or 7.12% lower at $60.00/bbl and Brent May futures dropped $4.72/bbl or 6.94% to $63.28/bbl. Following crude oil market, US corn, soy slumped in broad-based commodities saw selloff, as a firm US dollar and tumbling energy prices stoked broad selling across commodities markets.

The vaccine rollouts in Europe and the reintroduction of lockdowns in parts of France amplified market fears have been one of the bears dragged energy prices. But more said the drop was anticipated. The benchmark U.S.10-year Treasury yield jumped 11 basis points to break above 1.75% for the first time since January 2020. European markets pulled back on Friday after a spike in bond yields reignited concerns about stock valuations and prompted a sell-off on Wall Street.

Caprolactam: stagnated for two days, may fall again

Chart 1. CPL RMB spot and contract nomination comparison in 2021

Caprolactam, as an intermediate to make nylon 6, though not traded in the commodity exchange market, is influenced by a major chemical raw material benzene, which is mainly derived from crude oil. CPL market had started a steep rise since Chinese market returned on Feb 19, with the RMB spot index rising 1,800yuan/mt or 14.06% from Feb 19 to Mar 8, since when market entered into downward consolidation. CPL spot price kept downward trajectory since Mar 9 to Mar 17, seeing a drop of 1,100yuan/mt or 7.59%. Then on Mar 17 and 18, the market stagnated at 13,500yuan/mt, when Sinopec cut the Mar contract nomination price down by 300yuan/mt to 14,200yuan/mt, narrowing down the spread with spot.

Chart 2. China CPL price and profit trends

Despite of recent decline, CPL plants were still gaining good profit based on current cost. CPL remained a relatively firm product in the industrial chain, as its margin based on benzene spot stayed well above the break-even line, while its downstream product bright CS chip, suffered heavy losses based on the hand-to-mouth mode (see in below chart 3).

As to CPL supply and demand fundamentals, CPL plants had been running at steady-to-higher rate in late Mar-Apr 2021. According to plant survey, Shandong Luxi had recovered its 100kt/year production line since Mar 12 to full rate by Mar 18; Haili Chemical was restarting the long-term closed 100kt/year production line in Jiangsu, and might resume commercial sales on a later date in May; Only Fujian Shenyuan had announced some losses in supply due to raw material production issues, as the company would reduce supply to contract buyers by 20% in April. By Mar 19, Chinese CPL producers had been running steadily at 92%, a considerable high rate in the history. If no supply issues appear in late market, CPL supply is possibly getting longer.

Nylon 6 CS chip: bottoming period may be prolonged

Nylon 6 bright conventional spinning (CS) chip price index had dropped significantly by 1,200yuan/mt or 7.95% to 13,900yuan/mt during the two weeks in Mar 4-18, to the same rate since market reopened on Feb 19 after the Chinese Lunar New Year holiday. As said in the insight report Nylon 6 CS chip: an initiator of the industrial decline, CS chip plants had cut down operating rate since Mar 11, the utilized rate falling from 85% to 78%, as a counter measure to the bleak sales and accumulated inventory.

chart 3. Nylon 6 CS chip price trend and margin

But as downstream traders and manufacturers held back on sidelines for weeks, their chip stocks were gradually consumed to low, and as price already returned to the rate beginning post-holiday market, the market was already near the bottom line. This had strongly hint a bottom out in CS chip market, especially after considering its hand-to-mouth profit margin on spot CPL had dropped to the negative zone of minus 500yuan/mt to minus 1,000yuan/mt. For both CS chip producers and buyers, it seemed to be the time of a revise.

However, this strong bear from crude oil market could put a question to that, as the slump in oil price would lead to a series of decline in its derivative chemicals including benzene, and thus interrupt the original trend in the intermediate products. The bottoming period for CS chip market may be prolonged, as traders and buyers would choose to wait as long as possible to make sure the market would not further decline.

Nylon 6 textile filament: more adjustment to inspire downstream procurement

Similar with other textile raw material fibers, nylon 6 textile filament market had been consolidating since Mar 5. Still, observing the trends with polyester FDY, VSF and cotton yarn, nylon 6 FDY trend was rising in end-Feb to early Mar, when other textile filament market had ceased increase. It means that for end users nylon 6 FDY is a more expansive raw material, when comparing with other major chemical fibers, especially polyester filament, which is sometimes considered a cheaper substitute of nylon filament.

chart 4. Major textile fiber & filament price trends

The purchasing of nylon 6 textile filament was also largely influenced by its upstream market sentiment. End users would stay very cautious in restocking filament when upstream intermediate and polymer market is still in an adjustment stage. The turnover may continue to be lackluster in NFY market. However, as nylon filament plants purchase contract raw material, the high contract nomination by Sinopec may still nail the mainstream price, while some plants under sales pressure or use a lower-grade polymer may offer discount in real transaction.