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Insight | Time:Jan 4 2017 9:37AM
Profits lean to CPL market seriously after surging prices in nylon industry
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1. Profits were partial to CPL market, though downstream market tracked the large increases of upstream market.

(1). CPL plants were the biggest winner.

The benzene-CPL price spread trend mainly kept in line with CPL price trend. From Jan to Oct, benzene prices basically fluctuated slightly in a range of 4,900-5,300yuan/mt, and with changing CPL prices, price spread also fluctuated in a range of 4,500-6,000yuan/mt. From November to December, CPL prices rose almost 6,500yuan/mt to 17,250yuan/mt, though benzene prices also surged, and the highest went up to 8,000yuan/mt. Therefore, the price spread also rose largely to 10,000yuan/mt. Based on costs at 7,000-7,500yuan/mt, CPL cash flow went up high at 2,500-3,000yuan/mt.

Larger price increases of CPL than feedstock were also supported by fundamentals. From mid-November, the operation rate of some CPL plants dropped due to tight supply of benzene and cyclohexanone, and some plants shut down for maintenance, so supply extended to be tight. Besides, the new line of Hengyi’s No.2 chip plant started up in end-Nov, so high-grade CPL sources were seriously tight. Due to tight CPL supply, nylon 6 chip plants were also forced to reduce production gradually. Tight supply became the perfect catalyst for the huge profits.

(2). The profits of chip plants were divided largely.

Profits of nylon 6 chip plants were largely divided. Cash flow of nylon 6 HS chip market basically kept fluctuating in a range of 1,500-2,000yuan/mt, and it was hard to make profits. In particular, affected by low nomination and high settlement of Sinopec and DSM Nanjing, nylon 6 high–grade HS chip market suffered evident losses, and losses in Nov were especially serious. However, nylon 6 CS chip market rose upon the rising CPL market. Buyers purchased a lot when prices went up largely, so CS chip plants oversold and then lifted prices rapidly. As a result, profits of CS chip plants were close to high CPL profits.

Traders expected a bearish market and sold with discounts, as CPL market increased slowly in mid-Nov and chip prices stabilized. As a result, nylon 6 CS chip market was also evidently divided. Mainstream plants lifted prices continuously in Jiangsu, and offers for general-grade CS chip sources went up to 20,000-20,500yuan/mt by end-Dec. But prices of some traders and chip plants in North China were low at 18,000-18,800yuan/mt. Thus, the cash flow was in a big difference. The higher cash flow reached 1,500-2,000yuan/mt while the lower was close to the cost line. However, for plants offering high, actual deals at high prices were still limited, and the profits were still lower than CPL.

(3). The cash flow was close to the cost line.

Textile filament prices began to rise from mid-Nov, which was later than chip price increases. Short-term cash flow dropped rapidly, and filament plants suffered great losses. With surging feedstock prices, filament plants gradually tracked the increases with similar increases to feedstock prices, though downstream buyers showed great resistance to high prices. Therefore, the cash flow stayed around the cost line. After mid-Dec, prices rose slowly as it was close to Spring Festival. Most weaving plants had restocked textile filament previously, so they purchased textile filament less actively, and filament prices gradually stabilized. Thus, the cash flow stayed at the cost line.

2. The unbalanced profits may influence the feedstock restock of downstream plants before Spring Festival.

Profits are seriously partial to CPL market, and benzene prices keeps dropping from mid-Dec (benzene prices have dropped from 8,000yuan/mt to 7,100yuan/mt by end-Dec), so downstream plants restock feedstock more cautiously. Feedstock may keep rising if they restock more, and there may be little profits left for downstream plants. Slipping market may take place ahead of time after Spring Festival, as there has always been a slumping market after a surging market.

Thus, for filament plants that plan to stop production normally before Spring Festival, they may restock feedstock before Spring Festival, but they are not restocking actively at present. For filament plants that do not plan to stop production thoroughly, they may expect a bright market or they have restocked enough feedstock at previous low prices.
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