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CPL-nylon counter-trend increase on plant accident

2023-05-26 08:33:36 CCFGroup

Nylon market is quiet during this May Day holiday. Two major news has caused a great impact on nylon market.


The first one is on the industrial end. On the morning of May 1, Luxi Chemical's hydrogen peroxide production area had an explosion and the fire accident caused casualties. Subsequently in May 3, Luxi announced the temporary suspension of its hydrogen peroxide, caprolactam, nylon 6 and other devices, and the specific resumption of work time to be determined by scientific assessment.


The second is the re-emergence of the U.S. banking sector turmoil. Overseas market recession fears rise, and investors' risk appetite further decline. The poor performance of the demand side as well as the weaker mindset have triggered the crude oil market to continue to fall sharply. During the holiday, international crude oil prices have fallen significantly, with a cumulative drop of 10%.



WTI crude futures, daily K-line


The two unexpected events have cause two opposite impacts. As a result, CPL and nylon 6 chip prices still jumps up by around 200-300yuan/mt on the first working day after the holiday, under the downward pressure of bulk commodity and chemical.


  2023-04-28 2023-05-04 Change Change rate
WTI crude 76.78 68.56 -8.22 -11%
Benzene East China 7165 6915 -250 -3%
RMB CPL 12500 12700 200 2%
N6 CS chips 13200 13400 200 2%
PTA 6155 5950 -205 -3%
Styrene monomer 8260 8070 -190 -2%


But the price rebound is not just because of Luxi’s accidental event. Lunan Chemical’s production cut, lower-than-expected run rate of Lanhua and delayed startup of Eversun’s CPL new plant have all supported the market to some extent.


In addition, as crude oil prices have already fallen before the holiday, downstream buyers have not built stock due to the bearish sentiment. When market shows a sign of rebound, downstream buyers, who have been hesitating, gradually start to replenish. Trading of CPL has expanded in some regions since May 4. This further energize the price rise.


How will the nylon market be interpreted next? How much impact can the accident have on the market in May and even June? How much room for upward movement of absolute price?


In fact, it can be roughly told from suppliers’ behavior on May 4, when almost all of the sellers are yearning for sales. The reason is actually not difficult to understand.


First, the macro situation is not good. The probability of the banking crisis in Europe and the United States is not a short-term event, the essence is still attributed to the continuous interest rate hikes caused by the local risk detonation. Overseas markets are still trading in recession in the short to medium term, although China domestic market is gradually repaired and the economic cycle goes before overseas. But as the internal and external markets are highly correlated, the damage of external demand is still bearish on commodities.


Second, the market is not too optimistic about the late market of nylon. CS chip inventory has reduced in Apr, but part of plants still have inventory pressure. In addition, CPL plants are expected to recover normal production from turnarounds in end-May and June, and there may be new capacities. Demand side, textile filament demand is seasonally turning weaker after May. Therefore, chip plants are actively selling goods.


Third, chip plants want to regain profit. Chip plants who have bought CPL at 12,400-12,600yuan/mt in end-Apr, are selling at 13,400-13,500yuan/mt now. The processing margin is good already. They would rather seize this opportunity to regain profits.


On top of these, from CPL plants’ mentality, suppliers are more willing to keep prices steady instead of pushing up prices, since their profit margin is improving and operating rate is relatively steady, while demand is comparatively weak. When CPL price rebounds and benzene declines on May 4, CPL-benzene price spread has expanded by 400yuan/mt already.



All in all, from inside or outside the industry, it is not likely for price to rush up greatly in short. But as CPL plants’ operating rate is low, the price will not fall at least in the first half of May.


Though the short-term upward space in CPL price trend is not seemingly large, it does not mean that the impact of Luxi Chemical’s accident is small. In fact the counter-trend upward performance itself proves the impact already. The author thinks the impact of Luxi Chemical’s accidental shutdown is underestimated by the weak reality of macro environment and chemical industry.


As the wind vane of the low-end spot price, the effect of the unexpected parking of the big players in Shandong on the nylon industry is much greater than its share of capacity. Considering that Luxi Chemical may be closed for more than 2 months after this event, we could expect a way upward in related products, if the macro sentiment has been repaired in May-June.