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Insight | Time: Feb 20 2019 2:01PM
Caprolactam: new record, new balance
 
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In January 2019, CPL production has reached 296,000 tons in Chinese mainland, a record high. In December 2018, the production of CPL was 272,000 tons, which was also a very high level. Despite continuous high output, CPL market has been staying firmly at high. After the Chinese Lunar New Year holiday, sellers have pushed up prices and spot price has risen significantly from 12,800yuan/mt before the holiday to 13,700yuan/mt by Feb 19. The mainstream contract nomination has gone up as well, as Sinopec raises the Feb contract by 300yuan/mt to 13,500yuan/mt, liquid-grade products, 3 months payment, ex-works. Previously, it seemed that when the domestic CPL plants made high yields, downward pressure were usually accumulated. Last year, when the CPL monthly load exceeded 80%, the monthly average CPL price fell in the next month. However, the situation is the other way around. The reason is that the downstream situation has changed.

CPL Expansion (kt/year) Start up Nylon 6 chip New capacity (kt/year) Start up
Eversun 200 Jan-19 Sansuo 35 Jul-19
Lanhua 30 Jan-19 Luxi 50 Sep-19
      Hongsheng 50 Sep-19
      Luxi 50 Nov-19
      Haiyang 50 Dec-19
      Sinolun 30 Dec-19
      Lubao 35 Dec-19
      Haiyang 70 Jan-19
      Juheshun 30 Jan-19
      Juheshun 30 Feb-19
Total 230     430  

First, as shown in the second half of 2018, the growth of supply and demand has not matched. The number of new polymer projects is increasing, while new CPL projects are limited. As a result, the ratio of production capacity of CPL and nylon 6 chip has changed, or more precisely speaking, has dropped. Therefore, CPL plant operating rate needs to be improved.



Second, nylon 6 chip plant operating rate has been elevated. As seen from above chart, the increase in the operation load of nylon 6 chip plants is very obvious. The rise is most evident among conventional spinning chip plants. Since the end of December 2018, CS chip sales expanded and kept high through out January 2019. Eyeing on the golden time of positive cash flow and low product inventory, medium-viscosity CS chip manufacturers has decisively increased their daily output (the comprehensive margin of CS chip plants in 2018 has been relatively poor, and high margin in January 2019 appears to be more precious), up from a minimum average of 60% to more than 80%. The operating rate of all nylon 6 chip plants has increased from 70% to nearly 85%.

The balancing volume of CPL supply is inevitably uplifted by simotaneous rising in both capacity and operating rate of downstream section. There is a balance sheet of the operating rate based on CPL and nylon 6 chip capacity by the end of January 2019.

Product Capacity by end-Jan 2019 Balancing operating rates (%)
Nylon 6 chip 4.116 million tons/year 65 70 75 80 85 90
CPL 3.83 million tons/year 70 75 80.5 86 91 96.5

Note:
1.CPL to nylon 6 chip conversion rate: 1:1
2. The balance sheet assumes that the inventory level does not change.
3. Considering the impact of 10-20kt of CPL imports per month, CPLplant operating rate will be somewhat floating.

The balance sheet needs to be be adjusted appropriately with new capacities started up in the future. According to disclosed projects, the new capacity in nylon 6 chip section is still larger than that in CPL section in the first half of 2019. It means that CPL operating rate will be uplifted further to reach a balancing point.

In the new year, there is also a new balance between the upstream and downstream of the industry chain, and practitioners should also evaluate the market from a new perspective.
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