CPL rebounds, facing downward risks before Spring Festival

Since the beginning of December, trading of nylon raw materials, caprolactam and nylon 6 chip, has warmed up modestly. The weighted average of CPL RMB spot has risen by around 200yuan/mt from the lowest rate in end-November, and trading volume in nylon 6 chip market has expanded narrowly with some low-priced sources rebounding modestly as well.

We have noticed that in fact, not only nylon, but also several commodities with high correlation have generally risen recently.

From the industry itself, we cannot find too many direct positive factors. The support from Luxi Chemical's turnaround news last week is very short, and Luxi has not fulfilled its plan yet.

Yet combined with the recent general rebound in commodities, it is not difficult to speculate that the modest repair of nylon raw materials is mainly related to the external factors. For instance, the recent adjustment of pandemic prevention policy of China and the expectation of the US Fed's interest rate hike process adjustment.

China domestically, the adjustment of pandemic prevention policy means that the production and operation of enterprises will be more stable, the business of retail sales will no longer be easily disturbed, logistics and transportation will also be more secure, and the most important thing is that it is possible for ordinary people to go out for consumption. Therefore, the industrial pattern has changed from weak reality and weak expectation to weak reality and strong expectation now.

Judging from overseas market, the US CPI rate in November was 7.1%, lower than market expectations, and other leading economic indicators also showed signs of decline. This basically determines that the Fed will raise interest rate by 50 basis points in December. More importantly, it sparked market expectations that the Fed might end raising interest rates in the first quarter of next year. So we are seeing continued weakness in the US dollar and some strengthening in assets.

The core macro variables in China domestic and overseas market have certain degrees of improvement recently, so commodities have ushered in a wave of repair gains since the second half of last week. The periodic bottoming rebound has also led to part of the pre-holiday restock. At present, the market has reached a consensus on the expectation of a pick-up in demand next spring, and it is generally believed that there will be a rebound after the Spring Festival, so pre-holiday restock has become a topic of concern.

For the industry itself, from a relatively long-term perspective, the current price opportunities do outweigh the risks. However, if we consider whether there will be lower prices before and after the Spring Festival, the author is afraid we still need to be cautious for a while.

From the perspective of CPL supply and demand, although the restart of Lanhua Sci-Tech's CPL device is confirmed, other producers including Baling Petrochemical, Baling Hengyi, Tianchen Yaolong still lack enthusiasm for production due to continued losses. The operating rate of CPL plants in North China is higher than that in East and South China. Looking the industry as a whole, CPL is likely to maintain a balance between supply and demand or slightly longer balance in the second half of December and January.

On nylon 6 chip side, after a round of production cuts in November, there are no further reductions planned in December, and chip inventory levels are basically manageable. Although the reducing production of downstream before the Spring Festival may lead to an oversupply of chips in January, taking into account the idea of pre-festival restock and the speculation on long position of polymer plants themselves, they may not be further reduce production in January. According to an optimistic assessment, there may not be obvious excess pressure on CPL before the Spring Festival. The relatively weak link still comes from the north, and it does not rule out the possibility that individual factories will continue to reduce prices and promote sales.

In addition, compared with the pressure on the supply and demand side, the downwind of raw material benzene will be more direct in the current situation. Since November, port inventories have continued to rise and tank capacity has been tight, while the number of incoming ships has remained high in December, and some downstream factories have also said that factory tank capacity is limited. Judging from the recent failure of benzene's following up the rise of styrene, the weak trend is very obvious. If styrene is weak in the later stage, there is a risk of a rapid pullback in the price of benzene. If the price of benzene in East China falls to 6,000yuan/mt, CPL before the Spring Festival is most likely to drop below the line of 11,000yuan/mt.

Yet with the full spread of the new round of Omicron cases after the adjustment of prevention policy in China, the recovery sentiment could have been frustrated again. The recovery in demand could not be achieved overnight and it takes time and patience. Specific to the price level, in the case of CPL before the Spring Festival, we still need to pay attention to the purchasing power of the final reserve in downstream, as well as the downward risk from upstream benzene.