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Insight | Time: Mar 28 2019 4:36PM
A splitting way of nylon 6 HS chip
 
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Despite of a stabilizing trend in nylon 6 chip market, the spot price spread China-made high-grade and low-grade nylon 6 high-speed spinning (HS) chip is widening to 1,200-1,500yuan/mt now, with the narrowest gap around 500-600yuan/mt. Usually the price spread between high-grade and low-grade HS chip is kept around 200-300yuan/mt. Besides spot market, even contract prices of nylon 6 HS chip are evidently split recently.

Contract price of nylon 6 HS chip = Sinopec’s CPL contract settlement + processing spread (note: after profit rebate)

Processing spread (yuan/mt) 2017 2018 2019
High-grade semi-dull HS chip 1700-1750 2000 (several at 1900) 1750-1800
Medium-low-grade semi-dull HS chip 1600-1700 1800 1200-1500, (a few 1650-1700)

The sharp rise and fall of prices from the end of 2016 to the beginning of 2017 gave birth to the “Contract 1.0” for nylon 6 HS chip. In the first year of the contract implementation, the price spread between the high and low end sources was only 100-150 yuan/mt, and the rebate conditions were generally 100yuan/mt back after reaching 300yuan/mt, some factories do not even have the volume limit for rebate. At that time, the overall contract model was simple and transparent.

In 2018, as the demand for feather yarn continuously surged, HS chip was out of supply, and “Contract 2.0” appeared, with its conditions more favorable to polymer producers. Despite of rising processing spread and deposit, diversified rebate policies (by month, quarter, half year or year), the contract transaction proportion of HS chips kept rising to above 80%.

The highly profitable products attracted many companies inside or outside the industry. Large number of new polymer projects were scheduled, leading to a supply surplus expectation of 2019. Downstream filament plants were no longer active to sign the contract. In this case, some HS chip plants offered discounts in a bid to secure contract customers.

For instance, Hongsheng first lowered the processing spread for low-end products to 1,200yuan/mt, and then most other producers lowered to 1,200-1,500yuan/mt. But the low fee only lasted in Q1 2018, and in Apr, it quickly rose to 1,500-1,650yuan/mt. As for the price decline, Luxi was always the first one to lower the price when there were too many chips. Its price had hit the overall contract market evidently. But with such discounts, new contract execution also becomes difficult.

In 2019, the processing spread of high-end chip contracts was 100-200 yuan/mt lower than that in 2018. The contract conditions were also more favorable for buyers than that in 2018. The "Contract 3.0" was more with a taste of "private order". The processing spread was not as mixed as the low-end market, and contract sales took a proportion of around 70-80% of the total transaction. Spot trading had been reduced. And in order to keep steady customers, spot price was normally no less than contract price. The high-end chip market was so far relatively healthy.

However, there was also the fact that from December 2018 to March 2019, the new HS chip capacity has already reached 220kt/year (Haiyang 120kt/year, Yichen 70kt/year, Juheshun 30kt/year), while there is no new textile filament capacity started. During the Spring Festival in 2019, HS chip stock has been built up to 20 days and higher. Such high stock is not possibly to be digested fully by end users.

There are two ways expected. First, chip plants cut production. Second, stimulate downstream consumption and remove chip stocks to downstream. However, it is very difficult to fully stimulate downstream filament plants’ consuming power, when end users’ market has no specific point. And in order to destock substantially, chip prices would be cut down fiercely. Once spot price declines, the contract market cannot keep steady.

As new capacity continues to expand, the spot and contract market, high-end and low-end market will continue to split and will eventually lead to the formation of new “rules” in the high-speed spinning chip market.
[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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