Nylon filament inventory burden eased, yet pre-holiday pressures remain

Raw material prices surged sharply, driving gradual destocking at filament factories

Since the sharp rise in nylon raw material (CPL and nylon 6 chip) prices in November, CPL prices kept moving upward steadily in December and remained firm, which indeed facilitated the effective reduction of filament factories' inventories.

The notable inventory decline at filament factories in December was not driven by downstream fabric mills increasing purchases amid rising prices; instead, it was mainly attributed to fabric mills picking up goods smoothly.

In November, spot CPL prices surged by 1,000yuan/mt, while filament prices only rose by 200-400yuan/mt for some varieties. Before or at the initial stage of the filament price hikes, fabric mills placed orders with locked-in prices, but many verbal orders were not accompanied by advance payments, and the pick-up of goods was not proactive. This meant that if the market trend reversed downward, the probability of these orders being canceled would be relatively high. Since December, spot CPL prices have increased by another 400-500yuan/mt, and contracted CPL prices have also followed suit with a sharp rise of around 1,000yuan/mt. With raw material prices continuing to rise strongly, filament factories raised their quotations rapidly. Seeing that prices were unlikely to drop in a short period, fabric mills that had locked in orders at low prices in the early stage generally picked up goods actively, thereby enabling filament factories to reduce their inventories smoothly.

During October-November, inventories at filament factories were relatively high, generally standing at 40-50 days or more. Currently, the inventory level has generally dropped to 25-35 days, with a small number of factories reporting relatively low inventories of 15-20 days or less and some others with relatively high inventories of over 35 days. The industry-wide average inventory has fallen to around 30 days, a reasonable level.

High inventory burden eased, but pre-holiday pressures continue to build up at filament factories

Inventories at filament factories have generally dropped to a reasonable range, with pressure easing significantly. However, there is no room for complacency before the Spring Festival.

(1) Price rise pass-through remains challenging

Since the raw material price increases in November, chip prices have generally risen by 1,200-1,400yuan/mt or slightly higher, while filament prices have generally increased by 500-800yuan/mt from the low levels, with individual varieties up by 1,000yuan/mt. Nevertheless, looking at the transaction prices of filament factories, most orders were secured either before the price hikes or when prices rose by only 200-300yuan/mt; actual order volumes decreased markedly when prices increased by 500-800yuan/mt.

For filament factories, the goods picked up by fabric mills were mostly from low-priced inventories, so losses did not expand. The procurement prices of chips stocked by filament factories in the early stage were basically in the range of 8,800-9,500yuan/mt. As time went by, low-cost raw materials have been gradually depleted. At present, the cost of chips being used by filament factories ranges from 9,500-9,700yuan/mt for those with relatively low costs and 10,000-10,300yuan/mt or slightly higher for those with relatively high costs, indicating that the actual raw material costs of filament factories are rising steadily. As filament factories gradually exhaust their low-priced finished goods inventories and low-cost raw material inventories and switch to high-cost raw materials, the pressure of widening losses and accumulating high-priced inventories is approaching step by step.

(2) End-user demand shrinks, pre-holiday supply-demand pressures on nylon filament foreseeable

Price increases have not provided much boost to end-user demand. Recently, apart from relatively robust demand for the production of related fabrics such as mother yarn, air-covered yarn and fine-denier DTY, demand in most other conventional fabric sectors has weakened seasonally as usual. In addition, fabric prices are mainly driven by demand, and raw material increases have not significantly lifted fabric prices.

Some small fabric mills have already shown signs of production cuts, though the overall decline in operating rates is not obvious for the time being. However, as fabric mills gradually consume their low-priced raw material inventories, their core operational logic before the Spring Festival will focus on collecting payments and producing according to orders, with low willingness to stock up amid rising prices. As orders decrease, some fabric mills are expected to further cut production after New Year's Day; after mid-January, production suspensions and cuts at fabric mills will increase gradually, leading to a gradual reduction in the consumption and procurement demand for nylon filament, and filament factories will face inventory accumulation.

Against the backdrop of deflation and weak demand, fabric mills will shut down production for a longer period during the Spring Festival compared with previous years.

Filament factories are worried about inventory accumulation in January. First, due to the risk of losses from potential raw material price corrections before the holiday. Second, even if raw material prices do not decline before the holiday, they are concerned about inventory build-up across all links of the nylon industry chain during the Spring Festival, which will weigh on the market trend after the holiday, still posing the risk of losses.

Therefore, although inventory pressure at filament factories has eased for now, their operations before the Spring Festival will still be guided by cautious expectations. After New Year's Day, they may adjust their own operating rates gradually based on the pace of production cuts and suspensions at downstream factories.