CPL production cuts bite, yet prices keep dropping

Market Review

CPL prices have continued their downward trajectory, reaching 11,500yuan/mt on May 26, with month-to-date losses approaching 1,000yuan/mt. Production cuts have successfully reduced inventory levels - tank stocks are now low across both upstream and downstream units - and the processing margin has stabilized. However, the broader downtrend remains intact due to weakening feedstock support (sharp benzene declines) and persistent negative feedback from downstream chip, filament, and fabric markets.

Have CPL production cuts taken effect? The answer is yes. Sustained output curbs have resolved previous inventory pressures, and tank levels at upstream and downstream facilities are generally low. The measures have also reversed the continuous decline of CPL-benzene processing spread, which is now stabilized at 3,500-3,700yuan/mt.

Even so, the sector is still under strain. Many players are operating at a loss at the current spread. High sulfur prices and gradually falling ammonium sulfate prices have put cash flow pressure on the vast majority of plants.

Three main factors explain why producers have refrained from deeper production cuts amid losses:

1. Most CPL players accumulated profits in Q1 and intend to hold on for now.

2. Operating rates already drop to 70%. Further cuts will disrupt material balance, and producers are reluctant to shut down production lines.

3. Sliding benzene prices leave room for short trading to mitigate losses.

Although processing margin has stabilized, the sharp downturn across the chain means CPL cannot stay immune from price declines. Benzene has posted steep losses in both spot and futures markets recently, and the market expects further notable drops for forward contracts.

Key Drivers

# Cost

Benzene prices have fallen sharply, dragging the entire nylon chain lower. The benzene-naphtha spread currently stands at $180-200/mt-a level that appears unsustainable given widespread downstream losses. Moreover, the previously expected Q2 benzene destocking has been less pronounced due to delayed private refinery maintenance. For June, benzene supply-demand is now roughly balanced, removing a key price support.

# Supply

CPL operating rates have been cut to approximately 70%, which has helped reduce inventory levels. The processing margin has stabilized at 3,500-3,700yuan/mt. Nevertheless, most plants remain cash-negative due to high sulfur costs and falling ammonium sulfate prices. Further production cuts are unlikely based on the above mentioned three reasons.

# Demand

Downstream markets (chip, filament, fabric) continue to send negative feedback. Widespread "short-selling"-buying only hand-to-mouth or selling forward-has emerged as a rational response to falling absolute prices. However, this strategy is becoming less attractive as prices decline further, with risk-return profiles deteriorating.

Outlook

Short-term (June): With benzene downside potential nearing exhaustion, market attention will shift to PA6 and downstream inventory accumulation, as well as potential production cuts. Any CPL plant shutdowns could introduce price volatility, given currently low tank levels across the chain.

Key Risks

- Upside risk: Unexpected CPL unit outages amid low inventories could trigger a sharp but temporary rebound.

- Downside risk: Further benzene weakness or sustained downstream destocking would extend the current downtrend.