CPL fixes its bottom after a round of quick rise and fall

From the beginning of March to the middle of March, petrochemicals, driven by crude oil price fluctuation, had experienced a round of extremely rapid rise and fall in just half a month. 

During Feb 28-Mar 10, CPL RMB spot price rose by 1,550yuan/mt to 14,850yuan/mt, and Sinopec’s contract nomination had jumped up by 4 times by 1,500yuan/mt to 15,500yuan/mt. The frequency and magnitude of price adjustments have been rarely seen for so many years!

Decline soon came after Mar 10. During Mar 11-Mar 14, CPL RMB spot dropped 1,150yuan/mt to 13,700yuan/mt, and the contract nomination fell 2 times by 600yuan/mt to 14,900yuan/mt. As the spread between contract and spot stood as high as 1,200yuan/mt, it seems that contract suppliers will cut down the nomination further. 

On Mar 21 and 22, CPL spot rebounded narrowly to 14,000yuan/mt, after a short touch on 13,600yuan/mt. With contract nomination adjusted down 400yuan/mt in the beginning of the week (Mar 21), contract-spot spread has reduced to a reasonable rate of 500yuan/mt.

Actual transactions and profit are very thin

With so much volatility, it stands to reason that there will be huge profit space and trading opportunities, but the market is not like that. Because the oil price fluctuates beyond everyone's expectations, many sellers have worried that the cost will be uncontrollable when the price increases, and have stopped selling for a time. Buyers are more cautious, when the market trend changes, they do not take the goods at all. So in fact, after the crazy half month, there have been very few transactions concluded. 

For instance, the highest required price CPL once reached over 14,800yuan/mt in H1 Mar, but in fact, after a round of ups and downs, some spot CPL factories even missed a single order with a price of over 14,000yuan/mt.

Downward pressure from oil and the pandemic in China

The roller coaster market is first due to a jump in international oil prices, and also, the pandemic situation in this spring in China has a greater impact since the middle of March. 

From the perspective of demand, it is the time when spring clothing is on the market right now, and the current round of pandemic spread hits the express delivery industry greatly. Therefore, the market is worried that it will have a big impact on the textile and clothing industry in the near future, and the pessimism has magnified the panic.

Mentality recovers after the downward risks are removed

The sharp price adjustment also means that risks have been released to a certain extent, and trading has gradually resumed since March 16. 

From the perspective of supply and demand, the current situation of CPL and nylon 6 chip is similar to that at the beginning of the month. The contradiction between supply and demand is still not obvious, the inventory pressure is still not prominent, and the profit margins of CPL and nylon 6 chip are basically unchanged.

As shown in the two charts above, the spread between chip and CPL has waved fiercely within half a month, but the point is that they have all returned to the level at the beginning of the month. But since there have been not many transactions in benzene and CPL market in this period of dramatic change, so it is not statistically significant.

It is precisely because the indicators such as supply and demand, operating rate, inventory, and price spread that we have observed have not changed much before and after, so with the stabilization of mentality and the landing of news, the market seems to have gradually reached a certain consensus:

1. For oil market, it is generally believed that the risk premium caused by geopolitics has basically retreated, and the pattern of strong supply and demand has not fundamentally changed.

2. Support from cost side (crude oil, benzene and ammonia) is quite strong for CPL. It has find a solid base around 13,300-13,500yuan/mt, which appeared in February and early March 2022. 

3. Demand is still severely restricted by the pandemic in many regions in China, and it has caused heavy pressure on middle to downstream sectors in March 2022. But if properly controlled in the later stage, the marginal impact on demand will be weakened. CPL and nylon 6 market performance in end-March to early April will be definitely better than that after the Spring Festival (since early February).

To sum up, the downward risks in CPL market are lifted for now, while enterprises may still be cause in operation facing the serious situation of pandemic in China. The price trend is mainly driven by cost side, while transaction is hard to expand due to weak demand.