CPL: decline of benzene brings short-term pressure

Last Friday (Nov 24, 2023), Sinopec settled the November contract for caprolactam at 13,500yuan/mt, up 250yuan/mt from the October contract settlement (13,250yuan/mt), liquid-grade products, 6 months by acceptance, ex-works. With 3 working days ahead of the end of November, the monthly average spot price of CPL is estimated at around 12,950-13,000yuan/mt, up 300-350yuan/mt from that of October average spot.

As mentioned in our previous articles, the reason for the strong CPL (Caprolactam) performance was partly due to the impact of intensive plant maintenance and the relatively good operational status of downstream polymer plants, which did not create significant pressure on CPL. However, since late November, the situation has gradually started to change.

Firstly, the price of benzene has seen a significant decline, and it may even further expand. Due to continuous losses in the styrene units, some large styrene plants have announced maintenance plans, which has a considerable impact on the supply and demand balance of benzene in December. The previously predicted slight inventory accumulation of benzene in December has now been adjusted to a significant accumulation of 200,000 tons, and the port inventory is expected to rise to over 100,000 tons. Therefore, the benzene price will face certain downward pressure.

Based on previous experience, the process of benzene stock accumulation often starts with a phase of significant price decline, so there is relatively large downward risk from the end of November to early December.

Secondly, the downstream situation is mixed. Nylon 6 CS chip market is currently maintaining its relatively strong performance, with processing margins still high around 1,000yuan/mt. Each factory has an average of 5-7 days' of backorders to be delivered, and although the production and sales have weakened compared to the previous period, it will still take time for the accumulation of inventory. Therefore, the temporary pressure from CS chip supply and demand is not significant.

In nylon 6 HS chip market, except for the dull-grade textile filament, which remains relatively stable, semi-dull products have shown signs of weakening. The lower-end market is relatively weaker compared to the higher-end market, and both HS chip and textile filament segments are slowly accumulating inventory.

Thirdly, the supply and demand pattern of CPL is weakening. First, the supply tension of CPL will ease compared to the previous tight state. Nanjing Fibrant will restart at the end of November, and Baling Hengyi, Shenma, and Zhejiang Juhua will also resume full-capacity production, though Lanhua has planned maintenance in December. Second, considering the expected significant decline in benzene, downstream is likely to continue procuring CPL at need-to basis only. In this case, as long as CPL supply is not tight, it is likely to adjust downward moderately along with benzene. Moreover, the current price difference between CPL and benzene has already risen to a year-to-date high, which means there is space for CPL price to drop.

Overall, with the expanding decline in benzene, it is expected that CPL and nylon 6 chips will face some downward pressure. However, considering the supply and demand relationship in the industry chain and the current inventory situation, the pressure is not significant. It is anticipated that the decline in CPL and nylon 6 chips will be less than that of benzene, yet the short-term risks should be noted.