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Insight | Time: Jun 19 2020 1:26PM
An ignored supply-demand issue of caprolactam
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Beginning 2020, Caprolactam market had been heavily hit down by bearish demand due to the new coronavirus impact. And prices went through free fall when transaction dropped to freezing low. But since early April 2020, China domestic CPL prices had significantly risen by 3,150yuan/mt or 42% during April 1 and June 17, 2020. And even when Sinopec cut down benzene nomination in early June, CPL market extended the increase. This caused intense discussions internally.

There were some questions frequently asked as caprolactam price continued rocketing up: why CPL price could rose so much when China domestic plants were operating at such high rate? Is Market demand really good?

There are actually two key questions in the complex. Frist, why CPL prices could sustain such long-term increase when the average operating rate stood high? –It was because of the demand for CPL from nylon 6 chip plants was even larger!

In below chart, the red line showed total CPL consumption (based on China nylon 6 chip production and other CPL consumptions), and consumption was rising steeply since February 2020, and since April 2020, consumption was higher than CPL supply (CPL import and China domestic production). At the same time, CPL inventory slumped after reaching a historical high in March 2020.

The spread between CPL supply and consumption is rooted in the capacity gap between CPL and downstream nylon 6 chip. By early June, the capacity of nylon 6 chip plants in China has reached 5.1 million tons/year, while CPL production capacity is 3.98 million tons/year, significantly lower than downstream capacity. Even though CPL plants have ramped up their operating rate to 83%, while nylon 6 chip plants keep running around 68.5%, the utilized capacity gap remains around 190kt/year.

The first question has been answered, high CPL production rate has been supported by the high production of nylon 6 chip in China. Then, here comes the second one: Why nylon 6 chip production keeps such high level, or, is demand of nylon 6 really good? It is a more complicated question, contains the key point of the industrial chain’s development. Here in this article, we only discuss about short-term market status and the reasons behind.

In the above chart, nylon 6 chip inventory of chip plants has been reducing continuously since February 2020. Chip plants had been strictly controlling their run rate during Feb-Apr 2020, and inventory has been successfully removed when downstream constantly hunted at market lows. Then, chip plants keep running at high rates through May and June, based on low inventory and still profitable sales.

In conclusion, first, high CPL production rate is supported by the large demand from nylon 6 chip plants. CPL inventory dropped quickly and market was in tight supply in a time. So far, CPL low inventory may keep its firmness and draw more profit spread on CPL and nylon 6 chip sectors. Second, nylon 6 chip production has been evidently raised up after plant operating rate stabilized at around 70%. In short, it is supported by a low stock base in chip plants, relatively healthy profit, and some bullish expectation toward the third quarter.

However, it is another cause in terminal market. Whether the large number of chip is fully digested in filament makers, and how is the inventory ratio in textiles end...It requires more time to observe the order receiving in end user’s market and how demand development in the third quarter.
[RISK DISCLAIMER] All opinions, news, analysis, prices or other information contained on this report is provided by analyst of Zhejiang Huarui Information Consulting Co., Ltd (CCFGroup) as general market commentary and does not constitute investment advice. CCFGroup will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
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