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Insight | Time: Jul 23 2020 3:04PM
Nylon filament down to a valley in July
 
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The nylon textile filament market could be summed up with as "distressed" in July 2020: it followed the decline of raw materials, and dropped deeper than that of raw materials; demand in a traditional off-season contracted further under the falling trend. The condition of nylon filament makers was miserable.

NFY sales/production ratio drops significantly, inventory rising faster



Demand for nylon textile filament began waning since mid-June, and the situation got worse in July. Sales/production ratio of NFY plants was mostly around 50-70%, with very few making 80% or higher. NFY inventory was rising through day on day to over 30 days by July 23.

There are several main reasons behind the poor demand.
1. It is in a traditional off-season.
Seasonally speaking, nylon industry enters a slack sales season in June, and consumption would be further weaker in July even there is not an overall price decline.

2. The export recovery has failed to fulfill expectation. Apparel export recovered modestly since May, and it seemed to improve further in June. But the fact is apparel export of China dropped over 10% compared to the same period of last year. The gap is large.

3. Fabric production cut down amid fierce price competition and large stocks. During the period from April to June, the main reason for fabric mills to maintain production was not the actual demand for orders, but the optimistic expectation of rising feedstock market and the recovery of export. Fabric mill had been actively building inventor, await of a “recovery tide” of export. However, as China domestic demand gradually entered the off-season, and the recovery of export has been limited. Their expectations were not fulfilled, and their inventories had risen to 1.5 months or more. Huge inventory pressure cause market price to collapse, and fabric mills were dumping stocks at profit-losing rates. Suffering the losses, fabric mills gradually cut down production in June-July.

4. Raw material decline intensified bearish mood. As the price of nylon raw materials fell sharply, the pessimism of fabric mills was aggravated. And in this atmosphere, fabric mills tended to cut their feedstock consumption more than the reduction in production.

Conventional NFY products are mostly in losses amid fierce price competition.



Normally in a downtrend market, NFY plants using contract feedstock should gain more, as CPL contract settlement in the end of the month would be largely lower than the nomination level, and filament sales in the first half of the month, which was based on the high CPL nomination, would be eventually profitable. However, NFY prices had dropped more than feedstock market by middle of July, as the price was referred to a lower-than-expected contract settlement.

The comprehensive cash flow of NFY plants is estimated to be above the break-even line, meaning they are still profitable. But based on the full cost, some plants may suffer losses. In addition, the risks are building with inventory built up continuously through June-July.

NFY plants may not ramp up operation in short
As demand had been overdrawn in previous months, purchasing volume for nylon textile filament had been largely contracted in July 2020. In the short run, without a substantial recovery in end user, NFY sales could be hardly motivated even feedstock market rebounds.

It should be a time for NFY plants to prepare raw material stocks as the prices of CPL and nylon 6 chip have tumbled deeply for the second time in the year. However, assessing current demand performance and downstream purchasing potentials, NFY plants would not keep high operating rate toward the traditional peak season in August and September. High operating rate means rising capital and inventory pressure and risks, which are feared of NFY plants. A very possible strategy is to adjust operation according to actual consumption.
[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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