CPL: contract or other pricing system in 2023?

The contract fulfilling of caprolactam has been facing expanding obstacles in the year of 2022. Some people questioned whether or not the contract mode in caprolactam market will continue. The answer is yes. This is the result of the self-choice in the development of the commodity market, the contract reduces the negotiation cost. Since the stability of industrial production is indispensable, and contract is the best way to ensure it. Contract is a sign of the maturity of the commodity market, which is an objective trend. It is hard to imagine what it would be like for a 7 million tons/year (in the year of 2023) to lose a contract trading.

But we have seen that the contract trading has faded evidently in Jiangsu market in 2022, so some people have the suspicion that whether spot trading will replace contract mode more in the future?

Although there are rising challenges to contract trading, it is unlikely to be cancelled. Judging from the economic situation and capacity expansion in 2023, CPL is likely to be a buyer's market. Nevertheless, downstream nylon 6 chip plants, especially high-speed spinning chip plants, are also playing a seller's role, and they need contract mode to help secure their downstream, especially filament and fabric mills. From this point of view, the contract mode is the common wish of CPL producers, part of chip and filament producers, and the greater the production capacity, the stronger the need is.

Since the contract will continue, all that remains is the pricing issue. Again there is no doubt that the Sinopec's contract nomination-settlement will remain the key traded price in the market. The reasons for this come from a number of aspects.

Upstream and downstream's common appeal

First, as contract suppliers, neither Sinopec nor Shenyuan & Nanjing Fibrant is likely to take the initiative to cancel the contract mode, which is not in line with their interests. So it is certain that there will still be contract nomination and settlement system in 2023.

Second, based on the above analysis of HS chip- textile filament line, the downstream has reason to challenge the details and some terms of the contract, but there is no need to challenge the model and framework.

Third, according to the current development and cognition of nylon industry, we have not found a more suitable pricing system than the contract nomination-settlement mode of Sinopec. This is a very important factor. We will further discuss on this point below.

No other better pricing system than contract

The existing price mechanism of the nylon industry generally revolves around CPL price, while the pricing of CPL has always been based on the contract nomination and settlement. However, in 2022, the spot scale has expanded. Spot transactions have increased, and some upstream and downstream enterprises have explored the possibility of adjusting their price base from contract to the (monthly or weekly) average price index of a third party website like CCFGroup. Objectively speaking, spot pricing also has some problems, and the most prominent one is that there are too few samples. Even though the spot trading volume increased significantly in the second half of 2022, there were still some working days lack of actual trades, which means there was not price samples. This is due to the instability of spot CPL suppliers' operation, and the changes in the mentality of buyers.

The second is the convincing power of the spot price samples. Although the target scale is increasing day by day, there are a variety of downstream applications, and the chip quality is uneven. Corresponding to the quality requirements of CPL is indeed different. Although the current use of CPL is still not completely universal, still a considerable number of spot CPL is still not able to enter the production of HS chip or differential-grade chips. Therefore, the spot CPL average price is not applicable for all the HS chip and filament factories, who mainly sell their products by contract.

The third is downstream adaptation of the price system, which may be more prominent among filament enterprises. From a long-term observation, filament sales prices obviously lag behind CPL spot price waving rhythm. It is often the case that when spot CPL market prices have experienced several rounds of fluctuations, filament prices were unable to respond fully to the initial one. Of course, the weak demand in 2022 had exaggerated this situation, but it is undeniable that the price adjustment of nylon filament factories, especially non-integrated filament factories, is slower.

One case is that in many months of 2022, major contract suppliers, in order to strengthen the linkage with the spot market, raised the nomination first and then cut down the nomination, or cut first and then raised. Downstream feedback toward this strategy was very negative. It is incomprehensible for downstream filament enterprises for such frequent and inconsistent adjustment of contract nomination. Let alone the more flexible spot price changes. At this point, the advantage of polyester enterprises is that there are PTA and MEG futures, to maximize the realization of price discovery, but nylon does not. Nylon filament enterprises could not follow the pace in spot market. So is there any other choice?

To sum up, the existing CPL, nylon 6 chip, filament contracts are basically around the settlement price. At present, there is better pricing method that can be applied to all scenarios, so it cannot replace the contract nomination-settlement mode. Coupled with other factors including the subjective position of HS chip-textile filament chain, and their objective inability to adapt to the short and fast fluctuations of spot prices, it is expected that the contract model will continue, and with high probability be guided by Sinopec’s settlement price.

Of course, some changes in the market are also worthy of attention. With the continuation of the old pattern, the market is bringing forth the new at the same time. As CPL supply is getting longer and the market is changing to a buyers' market, some medium-to-low-end CPL producers are gradually adapting themselves flexibly, and the spot transactions will become more active. The pricing mode different from traditional contract nomination-settlement will also be gradually promoted in the exploration.