Is nylon 6 CS chip industry facing a reshuffle?

CS chip margin shrinks significantly in 2021

Nylon 6 conventional spinning chip (hereinafter referred as “CS chip”) has been through a very difficult time in the past 5 months. This is directly shown by the astonishing sharp fall in price spread between CS chip and CPL since late November 2020.

It is typically believed that he price spread between nylon 6 CS chip and its direct feedstock caprolactam should be more than 850yuan/mt to make chip production profitable. But the spread based on a hand-to-mouth mode of CPL replenishment indicates that CS chip plants are suffering heavy losses.

The spread in the above chart is only comparing prompt CPL spot prices and nylon 6 CS chip spot. Yet in actual situations, most CS chip plants in East China purchase higher-end contracted CPL, and North China suppliers use cost-advantageous spot CPL. In the latter scenario, CS chip plants are taking the low cost edge of local CPL resources, and their actual margin is higher than the chart indicates. In the former case, CPL contract suppliers would rebate chip plants in titles of freight subsidy or so, and this happens when CPL contract nomination or settlement prices are comparatively high, even higher than CS chip spot.

The poor performance in CS chip market also echoes with the continuous drop in their operating rate since early March 2021. The average operating rate of all nylon 6 CS chip plants dropped 20 percentage point from 85% to 65% over one month only. And such effort has not led to expected effect of reducing inventory. CS chip inventory has accumulated to above 20 days in late April, which is quite different from the situation in the first ten months of 2020, when CS chip inventory lingered low around one week only.

Reasons lead to weak CS chip performance
CS chip plants have had quite a good time before, and the recent weak performance is largely related to fast capacity expansion in recent years, attracted by previous lucrative profits. In 2020 alone, nylon 6 CS chip capacity had expanded by 280kt/year, taking 64% of total new nylon 6 chip capacity. And new chip capacities in 2021 are still focusing on CS chip sector. (Detailed chip capacity expansions and future plans are updated in the quarterly update of “2021 China nylon industry outlook report”.) The expansion tide results in the heavy burden in CS chip industry.

Making the situation worse, CS chip demand is retiring in 2021. The major growth point in 2021 has been linked closely with a different lifestyle and policy orientation during the global outbreak of COVID-19 pandemic. Working from home causes a surge in packaging food, which could be dropped at the doorway instead of contact-requiring purchase. Demand for nylon (or nylon composite film) has risen evidently. In the meantime, the consumption for home appliances has grown vigorously for similar reason. To encourage the macro economy, the government has boosted infrastructure construction, which also helps boost demand for nylon engineering plastics. These have all together spurred nylon 6 CS chip profit in 2020, and some long-term idled capacities have been restarted during this period as well.

But with the pandemic gradually being put under control, the above mentioned consumption returns to normal status, while the newly added capacities could not be cut out so quickly. Consequently, the supply and demand contradiction suddenly mounts.

Additional pressure derives from a strong feedstock performance. CPL capacity is comparative lower than nylon 6 chip in China, and this makes CPL a tougher side when making the price decision. Despite of weak performance in CS chip sector, nylon 6 high-speed spinning chip market is steady and healthy based on a rising textile consumption in the year. So CPL contract prices are likely to be boosted up. Stronger CPL price trend causes heavier losses in CS chip market, when it is fundamentally weak already.

Is CS chip industry facing a reshuffle in 2021?
Witnessing this situation, insiders begin to talk about a reshuffle in nylon 6 CS chip industry, and some are quite confirmed that parts of CS chip plants will be phased out since 2021. This website also agree with this widely held opinion in a long term, as the survival of CS chip plants with less cost advantage and competing strength will get harder in the future. But this process may not be as quick as expected.

First, CS chip plants are just suffering losses in the past 5 months, and the lucrative profit they have make last year may still sustain their operation in a time. And we assess this time to be around one or one and a half year.

Second, the Chinese CS chip plants are not divided in terms of production technology, so their production cost is similar. The spread is on management, investment capability and feedstock purchasing strategy, etc. Yet these factors usually shift from time to time, and may not become an absolute advantage or disadvantage.

Third, CPL market may become less strong in the second half of the year, as new capacities are intensive. About 850kt/year of new CPL capacities are expected to start up in H2 2021, and this may drag down CPL cost. The supply and demand structure of CPL may be re-shaped and price is likely to come down apparently. This could relieve the burden on CS chip plants.

Enterprises may retreat but the capacity will cling on
A reshuffle of CS chip industry is not that easy. Even the enterprise has retreated from the industry, the capacity is likely to stay, as most production devices are similar. And when the market is improving, the idled capacity may be restarted, in the hand of another capable player. This is quite a different case from real capacity phase out.

To conclude, it is still too early to talk about an industrial reshuffle, but it seems just a matter of time. The upcoming new CPL plants including Hualu Hengsheng and Lunan Chemical are also planning polymer production, and the integrated capacity will largely reduce cost for nylon 6 polymer production and raise their competiveness in the market. This will be a real threat to stand-alone chip producers.