How can nylon filament factories break through the dilemma?

As November draws to a close, spot CPL has accumulated an increase of over 1,000yuan/mt since the raw material-driven price hike at the start of the month; driven by costs, chips have also gradually followed suit with increases ranging from 800 to 1,000yuan/mt. Under cost pressure, filament factories made tentative moves to raise quotations by 200-400yuan/mt today, but the actual transaction price hike did not proceed smoothly. In the early stage of the price increase, some transactions still maintained the original price, or a small number of previously low-priced shipments saw increases of 200-300yuan/mt, indicating significant resistance to the nylon filament price hike.

The strong resistance to the nylon filament price hike is mainly due to supply-demand dynamics and the following factors:

(1) Unfavorable supply-demand balance

Excessive new capacity additions in the nylon filament industry this year, coupled with a significant slowdown in demand growth, have led to prominent supply-demand contradictions. Even in October, the traditional peak season in the second half of the year, filament factories' destocking was not obvious, and the industry's average inventory remained above 40 days. By the end of November, part of the market demand has weakened seasonally, and some fabric factories still hold high finished product inventories. Despite the strong upward trend in raw materials, there has been no corresponding drive in the fabric sector. Therefore, from the perspective of fabric factories, domestic sales orders will decrease month by month before the Spring Festival, while nylon filament supply remains sufficient, resulting in low purchasing initiative among fabric factories.

(2) Abundant low-priced finished product inventories at filament factories

The average inventory of nylon filament factories still exceeds 40 days, with sufficient stocks mainly consisting of low-priced inventories. As raw material prices continue to rise sharply, theoretically, the value of filament factories' inventories is also gradually appreciating. To promote transactions, some filament factories maintain the original price or only raise prices slightly for their low-priced inventories. The abundant low-priced inventories can still alleviate the short-term pressure to follow the price hike.

(3) Filament factories hold varying amounts of low-priced raw material stocks

Due to several rounds of market trends this year where raw materials bottomed out, rebounded rapidly, then fell back to new lows, filament factories mainly adopted a wait-and-see attitude and made limited purchases in the early stage of this CPL price surge. In the second week, as the effect of CPL enterprises' coordinated production cuts gradually took hold, some filament factories stocked up at low prices, but a considerable number still remained on the sidelines. In the third week, CPL continued to rise rapidly, and chip factories began to accept orders at low prices with volume controls, leading to chip prices quickly following CPL's upward trend. For filament factories, there was no longer an advantage in chasing the price hike, so they mainly continued to wait and see. By the end of November, most filament factories had sufficient low-priced raw material stocks to last until the end of December, with some stocks lasting until December 15-20, while others only had stocks until early December. For factories with relatively abundant low-priced raw material stocks or integrated enterprises, due to their cost advantages, the urgency to raise prices in the short term is not high in order to promote order acceptance.

(4) Difficulty in industry coordination among filament factories

The combined capacity of the top 4 major factories in the industry accounts for less than 40%, making the concentration of the nylon filament industry far lower than that of polyester, spandex and other industries. Additionally, there are significant differences in the degree of integration. In the past two years, many new factories have emerged, facing great survival pressure, but some of them have strong group backgrounds and financial strength; although old factories have low production efficiency, they face less financial cost pressure. Therefore, due to differences in corporate backgrounds and survival pressure among various filament factories, coordination is extremely difficult. Two industry coordination meetings have been held, but no substantive measures have been taken to alleviate the current predicament.

By the end of November, CPL remains strong, and chip factories without supporting CPL capacity are also conducting coordinated self-rescue by actively following the price hike. Currently, there is a huge disparity between the growth rates of filament prices and chip prices. If individual filament factories forcefully raise prices, it will inevitably lead to an increased risk of customer loss; if filament factories stop raising prices, after consuming their low-priced raw materials-especially those that will have no low-priced raw materials left in early December-they will have to purchase high-priced raw materials, resulting in a significant increase in loss margins.

Stopping production and selling inventories in December would be the best way for filament factories to control losses, but the Spring Festival this year falls relatively late. Stopping production too early may lead to increased risks of recruitment difficulties and loan withdrawals next year. Faced with the current predicament, filament factories are generally caught in a dilemma.

How filament factories break through this predicament will be the key operation in December. The author believes that first of all, it is not advisable to be overly bearish on raw materials. Even if the growth rate of raw materials slows down in the short term, it will be difficult for them to decline. Chip factories are also facing high cost pressure. Therefore, filament factories with insufficient low-priced raw material stocks may consider appropriate production cuts to reduce the consumption of high-priced raw materials. Secondly, prices should still be raised gradually. Given the current terminal demand situation, it is unlikely that fabric factories will increase speculative purchases due to raw material price hikes. Moreover, fabric factories will shut down for a longer period during the Spring Festival this year compared to last year. Even for factories with abundant low-priced raw material stocks or integrated enterprises, it is necessary to consider the supply-demand pressure around the Spring Festival. They can arrange production controls as early as possible to reduce inventories and promote price hikes across the entire industry.