CPL processing margin keeps high on tight supply

Starting from the end of November, benzene prices had seen a significant downward adjustment, and CPL followed the downward trend to a periodical bottom levels of 12800-12850yuan/mt as of Dec 8. However, compared to its raw materials, CPL showed resilience with a smaller and slower decline. As a result, CPL's processing margin has significantly rebounded before the end of the year.

Looking at the chart above, this round of CPL processing margin has significantly rebounded. CPL-benzene price spread has reached almost its highest year-to-date level and has been proven to be more sustainable than previous peaks. Having such a good performance in December is indeed beyond insiders' expectations.

The current good supply and demand relationship is key to the high processing margin of CPL. Currently, the overall inventory of downstream nylon 6 chip in plants, traders and its downstream is still low, with slight differentiation in their price spreads. Low-end semi-dull high-speed spinning (HS) chips have some pressure, but they have improved relative to the tougher time period in mid-November. Bright conventional spinning (CS) chip's processing margin remains stable at the level of thousands of yuan, which is an absolutely no-pressing level.

From the perspective of market trading participants, the waiting time of delivery for CS chips has slightly reduced, but the overall supply is still somewhat tight. Most of CS chip factories have no sales pressure. Although individual sales/production ratios lowered for a few days, the order taking is still sustainable based on a weekly or biweekly outlook. In addition, due to most downstream had been bearish about the future market, their restock was limited, and even more so for traders who are mostly in a wait-and-see mode. In such a situation, the seller's production and sales ratio reflects the actual terminal consumption level, indicating that the current market operation is indeed very robust.

Therefore, since CPL and PA6 are so resilient, does this mean they can continue rebounding upward? 

1. Actually in the past two weeks, we have seen CPL and CS chip prices narrowly rebounded up. However, from the current known news, there is no plan of CPL plants to reduce supply. From a performance standpoint, the probability of factories actively reducing production is very low. This means that it is difficult to provide a chance to rise from the supply side in the future market.

2. The main factor for market rebound may still come from the cost side. The stability and continuous rebound of the cost side will drive a shift in mentality, from need-to purchase to replenishment to cover rigid demand as well as some speculative need. The performance of the cost side, crude oil and benzene prices are showing an upward trend, and CPL processing margin has been reduced modestly in early Dec but soon recovered to above 6,000yuan/mt.