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Insight | Time: Aug 12 2020 3:37PM
Explore a relatively reasonable caprolactam contract settlement prediction method
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In mid-July, CCFGroup nylon editor has visited some companies in the nylon industry and talked about the current problems and challenges, including the unpredictability of CPL contract settlement prices. Inspired by the moving average forecasting method proposed by an industry veteran, here we make a simple argument and explanation just for reference.

The backdrop of CPL contract settlement influence on the industry
Due to the unpredictability of the settlement price, it has been difficult for companies to decide the cost before major contract suppliers announce the monthly settlement. This has affected the quotation of downstream products and caused great uncertainty to the sales profit of the month. In order to ensure the profit, nylon 6 HS chip plants has decided to also sign contract with downstream filament makers based on the monthly settlement price of caprolactam. (Nylon 6 chip HS contract price is using a negotiated processing fee additional to CPL contract settlement.)

The settlement price of CPL is directly related to the benefits of the entire industry. Therefore, the announcement of CPL settlement at the end of the month has always been the most concerned event in the nylon market.

However, due to objective market reasons and product characteristics, not all sales can be contracted. Thus cost control, more directly speaking, the forecast of CPL settlement has always been the core task.

Comparing CPL contract settlement and two algorithms of spot monthly average
In fact, in some public or non-public occasions, mainstream factory suppliers have stated that the main basis for monthly settlement is the monthly average spot price, and they will also make reasonable corrections based on some X factors including benzene price trend, CPL plants’ sales/production ratio, and future expectations, etc. Based on this method, we might as well take a look at historical price comparisons.

Here in below chart, we take as samples CPL settlement price since Jan 2014, when the settlement is only for liquid-grade CPL.

There are two algorithms of CPL spot monthly average, natural monthly average and contract monthly average. The contract monthly average is the average of spot price from the 25th of the previous month to the 24th of this month.

The settlement price is mainly based on the monthly average spot price, and it can be seen that long-term tracking comparison shows that the lines are almost consistent.

Then we will analyze the spread between CPL settlement price and the two monthly average spot prices, caused by the X factors.

  Price spread 1 Price spread 2
  CPL settlement price - Average spot price of the natural month CPL settlement price - Average spot price of the contract month
Average since 2014 242.9 227.7
Standard Deviation since 2014 237.4 388.8
Average since 2018 241.4 193.5
Standard Deviation since 2018 167.2 236.4
Average since 2020 296.9 277.7
Standard Deviation since 2020 116.2 295.9

Price spread 1 = CPL settlement price - Average spot price of the natural month
Price spread 2 = CPL settlement price - Average spot price of the contract month

Both spreads since 2014 have been basically waved between the range 220-250yuan/mt. But in the method of standard deviation, spread 1 is always lower than spread 2, which means the natural monthly average is of higher relative stability, and is more meaningful in predicting the contract settlement.

Considering that the contract settlement model has been more stable in recent years, and the market has fluctuated sharply during 2016 to 2017, we will compare the data from 2018 to the present. The results are that the Average price spread 2 is lower than spread 1 since 2018. It means that the contract monthly average is closer to the settlement. But still, the natural monthly average has higher stability in the spread with the settlement.

Since 2020, the payment term of CPL settlement has been changed from 3 months to 6 months, same with spot payment term. And the two groups of data since 2020 shows that the contract monthly average is still closer to the settlement, and the natural monthly average still has higher stability in the spread with the settlement.

Deduction of settlement price prediction model
Based on the above analysis, we can propose a relatively reasonable settlement price prediction model based on the current supplier pricing rules: add the average spot price from the first working day of the month to the day publishing contract settlement, with a reasonable price spread. For example, the average price spread during Jan-Jul 2020 is 297yuan/mt, and it can be referred to predict CPL settlement price of the future contract settlements. This spread should be adjusted retrospectively every six months or a year.

It should be noted that the model proposed above is designed from the perspective of the rationality of prediction. It is true that many senior insiders may not need to rely on so-called models and methodologies, instead be more practical and accurate to predict directly based on experience, but it is not comparable from the perspective of price consistency. It will give reference to spot suppliers in offering, based on a relatively reasonable expected settlement price and the processing feed.
[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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