CPL fundamentals weakens marginally, facing downward pressure in short

After the New Year holiday, CPL and downstream nylon 6 market have slowed down. Since the raw material (CPL and nylon 6 chip) prices are generally high, and downstream is mainly dominated by risk aversion mood. In addition, bearish sentiment has been intensified by CPL plants' restart plans. So far, CPL and nylon 6 spot are facing downward pressure.

1. Gradual recovery on CPL supply

There were several unexpected incidents in the CPL production facilities in December, and the operational capacity that was reduced has gradually been restored since the beginning of 2024.

As CPL processing fees are relatively lucrative, factories have a strong willingness to produce. In addition, Dongming Risun and Lanhua Sci-tech have announced plans to restart, although the specific recovery times still need to be confirmed, the increase in supply is almost certain.

2. Compression of CS chip processing margin

From November to December 2023, raw material prices were relatively strong, and the price increase in CPL was relatively smooth, which was also a result of timely follow-up increases in CS chip market and chip plants' consistently good processing fees. However, since late December, CPL price has increased rapidly, while the increase of CS chip price has slowed down, and the pressure from downstream to upstream gradually appears.

The drop in CS chip processing fees is even more rapid. Therefore, in the face of high CPL prices, a considerable number of CS chip factories have chosen to reduce production appropriately. Mainstream independent chip factories including Yuehua, Haiyang, Hongsheng, Yongtong, Sansuo, and Jiahe have generally reduced their operating rates.

With the increase in CPL supply and the decrease in CS chip consumption on a month-on-month basis, the profit margins will change, and the market will spontaneously adjust the supply and demand relationship under this driving force, which is very obvious.

3. Universal decline in commodity market

Entering 2024, both stock and commodity markets have experienced a general decline. The chemical market has seen a continuous occurrence of large decline daily K-lines in the past two weeks. Although individual products have risen against the trend due to transportation issues, it is evident that the situation is declining for varieties that are closer to CPL and nylon sectors. Although the logic behind this round of commodity price declines is not clear, the chemical index has fallen to previous levels and shows signs of breaking through support levels. Bearish sentiment is likely to dominate the market in the near term.

In summary, in the short term, CPL and nylon 6 CS chip spot prices will face downward pressure. However, due to the uncertain restart progress of Lanhua and Dongming Risun's CPL production, the strong performance of benzene recently, and the relatively low social inventory of CS chip, the pace of this round of declines may be relatively slow.