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Insight | Time: Mar 30 2020 5:03PM
How can nylon filament plants respond to the strong bears?
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1. A large number of orders cancelled for textiles and apparels, the influence will gradually reflect in NFY market
In early March, the COVID-19 pandemic in areas outside China developed rapidly, and many countries entered an outbreak period. In mid-March, in order to control the pandemic, many countries began to close the board, resulting in large number of China's textile and apparel export orders cancelled or postponed, especially in Europe and the America. It was a great hit on cloth and apparel enterprises, who were still producing to deliver the export orders. Moreover, China local demand was still in the recovery, and was no way to fill up the vacancy of the export orders.

That is why, when nylon filament price is already at a historically low, the cloth mills still do not restock to build stocks. High risks and low opportunities in short are the main reason for the bleak trading of nylon textile filament.

Short-term demand has shrunk sharply, and some cloth mills may reduce production. It is expected that beginning April it will clearly reflect in the consumption and purchase of NFY, which means that nylon filament mill may face a sudden drop in new orders after they have finished producing and delivering previous order by the end of March.

2. Raw materials continue to break new lows

At present, the price of raw materials are still breaking new lows constantly. The spot price of CPL has been lower than the historical bottoms of 1,000yuan/mt in 2009 and early 2016. At present, the market's confidence is still weak. In addition to demand factors, the price of benzene continues to drop, to less than 3,000yuan/mt (Sinopec contract price has dropped to 2,900yuan/mt), which is gradually approaching the bottom of 2,800yuan/mt in 2009, and the current benzene price in other market of Asia is less than 2,700yuan/mt, which means that there is still downward pressure on China domestic benzene prices. Recent CPL-benzene price spread has fluctuated between 4,600-5,000yuan/mt, currently at 5,000yuan/mt, above the break-even line of CPL production. Without any demand support, there is still room for CPL prices to fall.

For CPL, if oil prices will not fluctuate significantly in the short term, CPL not far from the low level. The spot price of CPL may fall around 400-500yuan/mt, and the utmost decline will not exceed 700-800yuan/mt.

For nylon 6 chip, the mainstream price of semi-dull HS chip is currently around 10,000-10,200yuan/mt, which is mainly taking the reference of Sinopec’s CPL settlement in March (9,200yuan/mt, 1200yuan/mt higher than the spot price of CPL). Sinopec’s April contract nomination will continue to decline. Nylon 6 HS chip market is expected to decline further in short.

3. Risk and opportunity coexist, rational bottom-fishing is possible
“Is it time to go bottom-fishing?” This question has risen among many players recently. The spot price of CPL continues falling, and the accumulated decline in nylon 6 chip market is smaller than CPL, so the downward space will be larger. However, both of them are close to the “absolute low”. So people are recently wondering whether to go bottom fishing and when. But no one knows the exact time that the pandemic will end, and the end user’s demand will recover. As export of end user’s market has been damaged heavily, there are so many uncertainties among insiders.

For filament mills, in fact, there is no contradiction between the bottom-fishing of raw materials and the control of demand default risks. The downward space from benzene to chip, has been condensed to near the extreme.

Filament mills can properly stock up nylon 6 chip according to funds, and demand and chip inventory in their hands; and filament mills also need to combine the situation of their finished product inventory, downstream customers' production reductions and downstream stocking intentions, NFY production costs and capital flows, etc., and reasonably arrange production, especially to make preparations for the situation that demand will not recover evidently, in order to prevent the excessive backlog of inventory and excessive capital occupation that affect the normal operation of the enterprise.
[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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