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Insight | Time: Jul 17 2020 11:03AM
CPL supply rose in H1 2020, but expected limited in H2
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The year of 2020 is rather difficult for most economies around the world. The drastic impact of the COVID-19 pandemic had paralyzed many industries, and for chemical industries the crashed oil prices directly caused the price plunge through the industrial line.

The nylon industry saw product prices reach the lowest level in history and large-scale production reductions in upstream and downstream. But with the epidemic was gradually controlled, a series of proactive and promising fiscal policies and flexible and appropriate monetary policies were continuously introduced, business operations and market confidence were gradually restored. Stimulated by the rebound in prices and positive downstream inventory replenishment, CPL production expanded rapidly and hit a new monthly high in June 2020.

CPL output peaked in June, output in H1 2020 tied that of H1 2019

According to CCFGroup survey, CPL production in Chinese mainland totaled around 316kt in June 2020, a recorded highest rate in history, up 31kt from the production in May 2020. It is the first time CPL single month production is higher than 300kt/year. When the epidemic rages on the globe, and all economies are performing lackluster, this is a remarkable achievement.

Admittedly, the June record-breaking output has its specific reasons: China domestic CPL plants had a round of intensive turnarounds in May and downstream released their demand intensively in June. But it could be still told as a sign of so-called economic resilience.

Although for the nylon industry chain, high production of CPL might not be a good thing, because high production could mean longer supply and softer price performance. But in the long run, production growth is one of the core indicators for judging industrial development.

Year Output Inventory of last year end End-Jun inventory Inventory change Net import Acutual consumption
H1 2019 1598 83 63 -20 95 1713
H1 2020 1638 66 102 36 106 1708

CPL import also reaches historical high
In the first half of the year, as both RMB and USD-based CPL prices fell to historical lows, China domestic polymer plants and traders had replenished a large amount of stocks at low levels. In addition, due to the extensive maintenance of China domestic CPL factories in May, CPL supply was extremely tight in a period, which also prompted polymer plants to seek imported sources for supplementation.

In the first half of the year, CPL imports reached 106kt (import in June is estimated), a slight increase from the previous year.

Based on CPL supply and inventory data till the end of June, the accumulative CPL consumption in the first half of 2020 tied that of 2019.

Risks and restricts in H2 2020
There are hidden dangers based on downstream performance. So far, the most prominent problem of the textile industry is the lasting sluggish end user’s consumption, and on that basis nylon textile filament plants had accumulated inventory pressure and cut down their production ration continuously. This would cause an ongoing pressure on the market from July. From the performance of the first half of the year, as the textile industry was under uncertain prospects, there were more speculative replenishment of downstream filament enterprises. Whether or not these products can be digested smoothly would also seriously restrict the performance of the nylon industry in the second half of the year.

2020 is destined to be a year of demand-led markets. CPL and nylon 6 chip are more seriously oversupplied than the downstream market, especially the filament sector. Therefore, end users' demand directly determines the market and the price trend and height of each links in the industry chain. The pandemic and the plunge in oil prices had affected downstream demand. There was a round of significant production reduction at polymer sector in February-April 2020, when CPL prices fell to historical low below 9,000yuan/mt. CPL market was led up in the second quarter, as recovery in demand just started, and speculative demand for rising oil prices continued to increase. It was a correlated effect of rising chip production ratio and CPL plants' production curtailment.

Based the above knowledge, CPL supply growth is expected to be limited in the second half of the year, the growth of the supply side may be more obvious. After the restart of Haili Dafeng (Shandong plant), Risun, Shenma, Eversun, and the possible startup of Shenyuan Phase II project, market in the second half of the year could be under greater suppression. Under this circumstances, China domestic CPL plants’ output in H2 2020 may be in a limited growth, especially when market prices fall to profit-losing rates. And due to a significant rebound in China domestic supply capacity and weak demand, it is expected that the import may turn down sharply. Both output and imports in H2 2020 are estimated to be grow slowly.
(More forecast details will be published in the second quarter update of 2020 China nylon industry outlook report.)

[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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