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Insight | Time: Jul 29 2020 3:56PM
Aug Nylon industry development mainly depends on filament
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Till the end of July, nylon market has come to a confusing point. Sinopec and Nanjing Fibrant had settled the July contract slightly higher than market expectation, and benzene market had ticked up continuously in recent days. CPL market was temporarily stabilizing.

Influence from benzene is weaker
Since the beginning of July to Jul 27, China domestic benzene prices have consolidated higher from 2,975yuan/mt to 3,430yuan/mt. As prices jumped up by 130yuan/mt on July 27, caprolactam spot sellers were supported somewhat and hesitated to offer.

However, given a high inventory pressure of port cargoes and full commercial tanks, the price increase in benzene is not seemed a sustainable one. A narrow increase of 300yuan/mt is likely to cap the recent benzene market. Looking into August 2020, the increase in benzene will not be easy, as the piled and upcoming imported cargoes will restrict any possible rebound, and its major downstream project styrene is also meeting obvious obstacles.

As for the support from benzene to caprolactam, higher benzene market will make CPL plants more difficult as the cash flow is almost squeezed out. However, the decline since end-June in CPL market is not closely linked with benzene as before.

HS chip market performance restricts caprolactam rebound in Aug
For CPL in August, the main crux of restricting market rebound is still the weak performance of the high-speed spinning chip market.
In July, downstream had some periodical concentrated replenishment for the conventional spinning chip during the continuous decline and players also tried hunting down the bottom. In the fourth week of July, sales of CS chip broke out, but during this bottom-hunting process, there were three phenomena showing that market confidence was obviously insufficient.

First, trading of nylon 6 CS chip soon drained off after a round of concentrated replenishment. After prices ticked up, there were almost no conclusions.
Second, the spree in CS chip market did not trigger any intensive restock of CPL, though this was somewhat due to tight liquidity of spot CPL and a low processing spread.
The last but most import, in a clear contrast, trading of HS chip in the day CS chip sales ballooned was rather bleak. It showed that the buy interest of downstream filament plants toward HS chip had dropped to an icing low point.

These three factors are indicating the still lacked market confidence, which is mainly provided by nylon textile filament, which is the largest consuming part of the industry. But there is one thing noteworthy, that the performance of HS chip market is gaining increasing attention of market insiders, to an extent that it could directly influence buy and sell decisions in CS chip trading. It is a signal of changes in the market, from a quick-decided trading strategy based on information asymmetry to a more cautiously-considered strategy.

CPL supply will increase in Aug, but not too much pressure
Entering August 2020, China domestic CPL production capacity is increasing on Shenma Phase II鈥檚 start-up. The first 200kt/year plant is going to bring the market of additional supply of 500-600mt per day. In addition, Haili has announced to restart its 200kt/year Jiangsu plant in the month, but likely in the middle or late of August. If Haili鈥檚 restart is delayed to after Aug 20, it may not influence the performance in the month largely. CPL supply is rising definitely, but the pressure it brings is not as large as it seems.

Till the end of July, CPL inventory is relatively neutral, not in short but not in burden. It is why CPL price decline has been controlled rather slow, unlike the dramatic falls in the past, as sellers were panic to dump cargoes at lower and lower rates in order to free their stocks. In addition, there is some hope that chip plants may raise up their production ratio in August 2020 as considering a possible lowest CPL settlement in the month may save them more cost. If this happens, it will offset partly CPL supply increase.

The key point lays in downstream
Based on the analysis above, the decisive factor is left in downstream nylon textile filament. Only the actual recovery of filament orders or filament plants鈥 intensive restock toward a bullish September may bring the industrial chain out of current valley. Benzene and CPL supply and demand (inventory) factors may have some guidance effects, but not deciding ones. The major trend of the market depends on the largest consumer of nylon.
[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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