Short term forecast for caprolactam

From a super short-term perspective, caprolactam spot supply, especially from suppliers in North China, such as Lunan Chemical, Risun, and Hualu Hengsheng, has become more abundant compared to the end of July and early August. As a result, it becomes more difficult for nylon 6 conventional spinning (CS) chip sales, and the pressure has been feedback to CPL link, causing a narrow decline in the week (Aug 7-11).

However, the price difference of CPL and benzene spot has dropped to a struggling place for CPL suppliers, since benzene market remains strong. Currently, benzene prices in North China are higher than in East China, which puts additional pressure on some CPL factories in North China, whose price difference with benzene is lower than what is shown in the chart above. Considering the performance so far this year, the author believes that there is limited room for further compression.

In the authors' personal opinion, the short-term outlook for CPL market remains bearish, mainly due to the possibility of a short-term downward correction in benzene.

Looking at the major downstream products, most processing margins have been compressed to previous lows or even hit new lows. Logically, price increases are not sustainable, and adjustments are inevitable for benzene, styrene and their downstream products.

Nevertheless, in terms of inventory and downstream operating rates, benzene remains strong status. According to CCFGroup market survey of benzene and its major downstream sectors' operation schedules, benzene inventory may still be reduced in August and September. This means that it is hard to see a significant decline in benzene in the overall third quarter of 2023. But, the short-term downward adjustments in benzene are still possible.

Chemical futures index

From a technical analysis standpoint, although crude oil prices remain strong, the fundamentals of China domestic petrochemical industry are average. There is a clear bearish divergence in the 2H K-line chart of the petrochemical index. Therefore, a short-term adjustment is anticipated.

Styrene futures index

Styrene prices have shown greater strength compared to the petrochemical index, reaching 8492 without a significant correction and hitting new highs. If the MACD double dead cross occurs subsequently, it will face the possibility of two consecutive bearish divergences, indicating a higher risk of a major downward correction.

Crude oil futures

Although crude oil prices remain strong, the previous resistance level cannot be considered as effectively broken (three consecutive days surpassing the previous high or a gain of more than 3%), so further observation is needed.

Considering factors such as generally low downstream processing margins and the probability of a technical correction, despite the strong supply-demand pattern, personally, the author still believes that both styrene and benzene will face adjustments in the short term.

Based on the expectation of a slight decline in benzene, although it may be challenging to further compress CPL processing fees, there is still room for a certain downward movement in CPL absolute prices.

(Note: Short-term views should not be equated with forecast for September.)