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CPL & PA6 enter rebalance toward end-2021

2021-12-03 09:13:16 CCFGroup

CPL spot market had slumped 1,550yuan/mt or 10%, and nylon 6 conventional spinning (CS) chip dropped 9% during November 1-26, but in the same period of time, upstream Brent crude futures and benzene spot slumped around 14%. The less-than-upstream decline in CPL still kept players worried about ate market.

However, the core factor of recent price fluctuations in nylon market is mainly caused by falling costs and external influence from the bearish macroeconomic outlook. From the perspective of supply and demand in the industry chain, the contradiction is not prominent.

Inventory is relatively low in both CPL buy and sell sides

The low inventory in CPL buyers is mainly because of buyers' cautious attitude in restock, when upstream prices continuously have dived. Before the end-Nov slump in crude oil, some players believed that 13,500yuan/mt would be a target bottom line and polymer plants might start building stock from this place. But after that, this thought has retired.

CPL suppliers' inventory is actually not high either. The prices of other raw materials other than benzene have also generally dropped. The increase in the price of by-product ammonium sulfate can basically flatten the cost of liquid ammonia and sulfuric acid (ammonium sulfate 2,100yuan/mt, liquid ammonia 3,700-3,800yuan/mt. The production of one ton of CPL requires 0.6 tons of liquid ammonia, and yields about 1.6 tons of by-product ammonium sulfate). Therefore, according to the current strategy of following the decline of benzene, it is completely acceptable for CPL manufacturers to maintain a difference of 7,000yuan/mt with benzene.

Downstream inventory not high or controllable

The operating rates of downstream nylon 6 chip plants have been maintained relatively low in the past few months, and inventory is also controlled. This is particular in nylon 6 conventional spinning (CS) chip plants, as most CS chip plants kept low rate of stocks and only a few prepared slightly more inventory. Nylon 6 high-speed spinning chip plants have cut production moderately during October-November given the power rationing policy in Zhejiang and Jiangsu provinces, and their stocks have also reduced. By the end of Nov, inventory of HS chip plants was assessed around 13.5 days and that in CS chip plants was only 5 days. Inventory of nylon 6 chip is not high or controllable.

CPL and chip plants are making satisfactory profit

As mentioned above, CPL plants are now in a satisfactory zone with benzene cost. And the situation is also similar in chip producers. After the continuously drop in CPL and slower decline in chip spot, nylon 6 chip plants are now in a satisfactory zone of profit margin. Current price different between chip and CPL is quite ideal.

Will CPL and chip plants lift operating rate?

At the end of November, one thing everyone is thinking about is to lift up the operating rate. In the past two weeks, both CPL and nylon 6 chip plants have been slowly uplifting their run rate, and that of CS chip plants has increased most quickly by 8 percentage point to 68%.

On one hand, higher operating rate means lower average production cost, which will yield more profit for the makers. On the other hand, there is risks of accumulative inventory after ramping up the run rate. And once it enters a bear market, there will be devaluation pressure on previously accumulated inventory.

As far as the current market is concerned, the market trend is completely unpredictable in both the short-term and the medium-long-term. The bull and the bear almost take 50% chance each. However, considering the upcoming end of the year, and relatively low operating rate throughout the year, it is quite certain for producers to lift up their run rate before the end of the year based on current profit and operating status. Based on this result of rising operating rate of CPL and nylon 6 chip plants, the market is forming a new balance.