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Insight | Time: Jun 30 2020 5:17PM
Pressure builds on nylon industrial chain, CPL price rationally falls
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Before the Dragon Boat Festival (June 25-27), Sinopec settled the June contract for CPL higher than market expectation, and finally triggered downstream strong resistance. The restock for nylon 6 chip and filament had been hampered and most buyers retreated to wait-and-see stance. Then, spot CPL price began to show a downward trend. On the first day after the Dragon Boat Festival, it really fell to 10,400yuan/mt, 6 months payment, delivered, and it continued diving.

The reason for this round of decline is quite obvious. First, feedstock market has been under pressure, whether it is benzene or cyclohexanone. The most prominent problem in the benzene market is the oversupply. As the cracking facilities, disproportionation units, teapot refineries, and hydrogenation-based benzene units have all maintained high operating rates, inventory has been building up high, and the storage tank is near saturation. Besides, as there are too many imported cargoes floating still, buyers tend to be cautious in replenishment. The outstanding supply has caused obvious pressure on the market of benzene in the near future.

Second, it is downstream demand. Due to the poor production and sales of nylon 6 chip recently, there is a growing intention to cut production among polymer makers. But the run rate until end-June has been kept steady. Given a more stable trading volume in contract, downstream have to resist spot market, as they tend to be more hesitating in restocking from spot sellers.

For CPL plants, as both upstream and downstream are weak and CPL factories currently still have considerable profits, so it is reasonable to appropriately yield in profit to downstream. Therefore, the decline in CPL spot price is per insiders' expectation.

In addition to this, there are two details of this round of decline that need attention. One is in the decline of spot CPL. It is a matter of the time and logic in the downward adjustment. In this round of price fall, low-grade CPL led the downtrend, and it was largely due to the restart of Fangming’s second line. Fangming's second line has been idled in long-term, and product quality in the earlier stage after restarting is inevitably unstable. So the products, which cause greater pressure on North China, especially Luxi Chemical and Yangmei, who chose to reduce price first. After one week, the higher-grade producers Sanning and Lanhua also cut down prices. This is the direct reason for this round of decline.

Another detail is in downstream demand. There are two types of demand, rigid demand from downstream plants and speculative demand from traders or plants. Based on downstream survey, rigid demand in June was almost equivalent to that in May, and even some areas continued to recover moderately. The change was in speculative demand. Speculators are most concerned about the price trend of raw materials. Previously, due to bullish trend in crude oil, benzene and CPL, downstream speculative demand was strong. Recently, as crude oil and benzene market began to show weakness, and players began to worry about a second outbreak of the COVID-19, speculative demand had slowed down, and downstream plants also had no intention to build inventory. It was the main reason in lower sales/production rate.

In any case, there is no doubt that the short-term CPL is facing a downward movement, but the market is not all bearish. The speculative demand will appear any time for benzene or CPL, and it is just curbed by a bear external environment recently. Toward the peak season from August to September, there are still chances for the bull.
[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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