Risk reminder: CPL & nylon processing margins depressed

Recently, the price of benzene has skyrocketed, leading to varying degrees of price increases in CPL and nylon 6 chip due to cost pressures. However, it is apparent that downstream industries are unable to fully pass down the price rise from benzene. In order to represent the total processing costs of CPL and nylon 6 chip, we calculate the difference between the spot price of nylon 6 conventional spinning (CS) chips and the spot price of benzene. As shown in the graph below, the total processing costs have gradually decreased since the beginning of July, in line with the violent surge in benzene prices.

The compressed processing costs mean that either CPL or nylon 6 chip is facing losses. Currently, both CPL spot and nylon 6 CS chip are to some extent affected. Yet, the contract market is relatively stable, with the difference of benzene and CPL contract settlements for July increasing by around 100yuan/mt compared to June. 

CS chip and downstream still weak

The compression of the price difference indicates a lack of enthusiasm among downstream. The core reason for this is insufficient demand, especially in the current nylon 6 CS chip market. July and August are still considered off-season for modified plastics, the major downstream of CS chip. Although price increases can drive some downstream buyers to place orders earlier, it is not enough to reverse the seasonal weakness. Therefore, it is obviously difficult to sustain a continuous and significant elevation as raw material prices at this critical juncture.

Textile filament downstream industries hard to follow up

The demand from textile filament is relatively better, but divergence is starting to emerge as well. The core reason is the too quick rising cost in contract. The July contract settlement for caprolactam was 12,600yuan/mt. As the price of benzene at the beginning of August had already reached 7,450yuan/mt, 1,000yuan/mt higher than in June, with no sign of retreat. Following the logic, the targeted CPL monthly settlement price for August may reach 13,600yuan/mt.

How much room is left for September? If there is only a slight increase or a flat trend in September, it means that there is a possibility of high-level buying between August and September. Even if there is no pressure on production and sales for filament factories, what about their downstream industries? Such concerns have gradually increased recently. In addition, the worries of downstream weaving and knitting factories about the rapid increase in raw material prices have become more apparent, and they are unable to continue passing on the cost increase.

Hidden risks for CPL

Regarding CPL, considering the maintenance plans of Hubei Sanning, Shenma and Sinopec Baling Petrochemical in August, it is still difficult to accumulate inventories for CPL. But since CS chip price margin has been compressed more. It is possible for integrated CPL-nylon 6 chip plants to take actions. For instance, cut chip production and sell CPL. It may be potentially negatively impacting the supply-demand balance.

From the perspective of CPL buyers, with the gradual stabilization of Risun's production, the tight supply in East China has eased. Buyers, who had no choice but to accept the increases in July, may become more resistant to the price increase. Based on the experience from previous rounds of negotiation, if the styrene market starts to retreat and the upward trend in benzene ends, the mentality of both CPL buyers and sellers could reverse at any time.

The above analysis is relatively subjective, but it can be certain that the price of benzene cannot continue to rise indefinitely even with good supply and demand fundamentals. The focus in the next phase will mainly be on the negative feedback from downstream industries. As of the end of July, the price difference between nylon 6 CS chip and benzene shown in the chart has been compressed to the previous low of 5,700-5,800yuan/mt, which suggests that this round of price increases has reached a risk point. Therefore, caution and careful consideration should be exercised in future perspectives and operations.