Is it time for the Asian Nylon 6 Industry to Rebound?
The year 2020 was certainly not a very profitable year for the petrochemical industry and definitely not for the nylon 6 industry in Asia. The COVID-19 pandemic significantly changed people's way of life, spending power and consumption habits. As mainland China and other Northeast Asian nations move to a new post-pandemic norm, the nylon 6 industry has been carving itself a new path in order to stay relevant and adjust to new demand patterns. Even as Asia slowly recovered from the pandemic through the second half of 2020, demand for nylon 6 textile filaments remained lackluster compared with nylon 6 engineering applications. As a result, many nylon 6 producers focused on the production of the general chip grade used in tire cords and the automotive sector, which helped them ride through a tough year. Almost all through Q1-2021, nylon 6 and feedstock markets have remained weak. However, prices have skyrocketed swiftly after the Lunar New Year. But is this now the time for the nylon 6 industry to rebound from the trough?
Miracle after the Lunar New Year?
The 2020 Lunar New Year holiday was viewed as a break for Asian market recalibration, but the dream was impacted by the spread of COVID-19. As with the previous year, market participants had high hopes that demand and prices would both recover after the Lunar New Year holidays in 2021. This time round, the prophecy seems to be have come true. Asian caprolactam prices soared in the third week of February as market players returned to the market after their holidays. The price spike appeared to be a response to mixture of factors including: (a) high feedstock cost and strong energy market, (b) supply tightness due to lower production (outside mainland China) and reduced long-haul imports, (c) some speculative buying and (d) a true rebound in demand. As of now, (a) and (b) seems to be driving most of the price rallies.
Fig 1 Asian Caprolactam and ICE Brent Prices
Figure 1 shows how caprolactam prices correlated with crude (ICE Brent) over the past year. To a large extent through 2020, caprolactam prices have been driven by feedstock and energy costs. Demand certainly improved towards the second half of 2020, but producers' margins have been under pressure through most of the year. Ahead of the 2021 Lunar New Year, the nylon 6 industry remained skeptical about the strength in the energy market. Asian caprolactam buyers were resisting a price hike since January despite the strong upward momentum in the energy market. Many buyers avoided committing to higher prices, but the situation finally changed after the Lunar New Year.
Cost transfer and margin improvement
Caprolactam supply in Asia (outside mainland China) was extremely tight after the Lunar New Year due to unexpected outages. At the same time, the energy market was on a strong upward trend, and Asian buyers were eager to replenish stocks. These factors supported Asian caprolactam producers to raise prices and improve margins. However, the question of whether or not high caprolactam cost can be effectively transferred down the nylon 6 value chain still remains.
Figure 2 shows price spreads for the Asian nylon value chain. Since the second half of 2020, the price spread between caprolactam and benzene had increased steadily, rising from approximately $700 per mt to around $900 per mt by the end of 2020. This was further amplified earlier this year, with the price spread hitting above $1,000 per mt. However, in comparison, the price spread between nylon 6 and caprolactam has remained in a low range between $200-300 per mt since the steep drop in April 2020.
Fig 2 Asia Nylon 6 Value Chain Price Spreads
The hindrance in passing on the higher costs downstream and diminishing margins is more apparent for mainland Chinese nylon 6 producers and downstream textile filament spinners. Similar to the Asian market, caprolactam prices jumped with higher benzene feedstock cost, but downstream markets struggled to follow the price hikes seen in the first quarter of 2021.
As seen from Figure 3, price spread between nylon 6 general grade chip and caprolactam dipped during the first quarter when caprolactam prices increased. Despite relatively good demand for the general grade chip, high operating rates resulted in a slight oversupply and hence producers had to sacrifice margins to keep inventory under control. In comparison, the high-speed spinning chip market appeared to be more stable, but the price spread between the high-speed spinning chip grade and caprolactam only hovered at around RMB1,000 per mt throughout the period when caprolactam prices spiked, indicating negative margins for producers. Textile filament (FDY) prices did rebound in the first quarter and its price spread with the high-speed spinning chip widened slightly. However, margins for textile filament producers remain extremely low due to poor demand.
Fig 3 Mainland China Nylon 6 Value Chain Price Spreads
Change of trade flow and towards market recovery
Despite the recent upward price corrections, it is not entirely evident that the market is clearly out of the woods yet. Demand has increased slightly after the Lunar New Year just as expected, but margins for downstream producers still have room for improvement. In fact, towards the second half of March, prices in mainland China have been witnessing some downward correction once again. A more outright market rebound still relies on a structural demand recovery in existing markets and opening up of new market opportunities. However, it is clear that producers have been adjusting their foothold and finding a new balance in the market. Take mainland China for example, as nylon 6 polymerization rates increased in the second half of 2020, their exports also increased significantly (Fig 4). In fact, in 2020, overall nylon 6 exports from mainland China increased by 4.0% year on year despite the pandemic. Towards the last quarter of 2020, mainland Chinese producers have explored new opportunities in Indian and Vietnamese markets, allowing them to raise their exports.
Fig 4 Mainland China Nylon 6 Exports
Taiwanese nylon 6 chip producers have similarly exploited the market recovery in India and Vietnam since the second half of 2020 but had lost some share in export market to mainland China due to poor cost competitiveness. In 2020, Taiwan nylon 6 chip exports plunged by 17.2% year on year (Fig 5). This is mainly due to the extended loss of demand from India during the second and third quarter in 2020 and also a plunge in exports to Japan towards the end of 2020. In addition, with high operating rates and low domestic prices in mainland China, Taiwanese producers find it increasingly difficult to export into the mainland Chinese market.
Fig 5 Taiwan Nylon 6 Exports
As we progress further through 2021, we expect trade routes to continue to adjust and new footholds to be established as new capacities come progressively online in mainland China. Downstream consumer confidence and demand must increase and stabilize further in Asia and other international export markets, before producers can truly expect better margins on top of the price corrections based on feedstock cost and temporary supply tightness due to production outages.
Chemical Market Advisory Service: Global Nylon Fibers & Feedstocks report provides a comprehensive view of world markets for the entire nylon value chain, from upstream caprolactam to downstream fiber chip and more. Through continual, personal contacts with key industry participants, Chemical consultants gather data specific to the nylon 6 and 6,6 value chains which they then analyze and translate into meaningful insights and forecasting advice. Clients receive weekly and monthly near-term price outlooks and detailed descriptions of key market indicators.
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