FocusStrong yuan, tight credit drives Asia capro

09 April 2008 05:31  [Source: ICIS news]

By Wan Hsin Hun

SINGAPORE (ICIS news)--Tight credit regulations in China and an increasingly strong yuan are supporting higher regional caprolactam prices as end-users turn to dollar-denominated imports which allow easier credit access, sellers and buyers said on Wednesday.

“The lack of cashflow is quite serious. End-users facing difficulty in getting bank loans for domestic material are buying imports even though they have to pay more,” a China-based trader said.

China implemented stricter credit controls late last year to curb excess liquidity and cool its economy.

Northeast Asian spot caprolactam prices hit a historic high of $2,520-2,560/tonne CFR (cost and freight) this week on high feedstock costs and limited supply, aside from Chinese end-users’ preference for imports.

Domestic prices, meanwhile, were at yuan (CNY) 22,200-22,500/tonne ($3,171-3,214/tonne) ex-warehouse, little changed from late January levels despite higher feedstock costs, according to global chemical market intelligence service ICIS pricing.

Regional prices are expected to be kept high in the second quarter and for most of this year largely due to growing overall demand, absence of new regional capacity and buoyant upstream values.

Nonetheless, trades were currently thin as end-users face stiff resistance in passing on costs to the underperforming key downstream nylon textile industry.

“A number of traders have left the market for the time being because of poor sales. Some end-users are buying straight from producers rather than through distributors so as to get cheaper cargoes,” another China-based trader said.

“Traders are becoming less and less active as the margins that can be made amid the high and largely stable prices are thin. It’s just not worth the risk. It is also possible that prices have peaked for the next two months,” a third trader based in Europe said.

Imports were similarly affected by the credit crunch although to a lesser extent.

“Requirements such as adequate deposits in end-users’ bank accounts before they can open letters of credit are blunting their buying interest,” a regional producer said.

Meanwhile, some end-users assumed a wait-and-watch posture as they expect imports to be more affordable as the Chinese currency continues to appreciate against the greenback.

“A few traders are maintaining long positions in the market as they are betting that the yuan will trade at 6.8 to a dollar by June,” an end-user in China said.

Looking ahead, prices are unlikely to fall soon despite the subdued market as the demand-supply balance remained snug.

“There are very few cargoes from Russia and eastern Europe, while the Mexicans are sold out. Prices may be high with trades thin, but the limited spot availability is helping to support high bid-offer levels,” the Europe-based trader added.

Cargoes were also not arriving from western Europe despite current record high prices in Asia.

“Prices in Asia are still not high enough to attract more arbitrage material. Spot in Europe is about €1,700/tonne ($2,669/tonne), which works out to be much more than $2,700/tonne after factoring in shipping expenses to Asia,” another regional producer said.

While there was concern that prices may crash as they are becoming unsustainably high, most sellers and buyers believe that spot caprolactam values in Asia will hover at a high and tight price range in the coming weeks.

“Prices are not expected to fall any time soon because of high crude and raw material values. Nevertheless, I think the numbers will stabilise by May and not climb much further as the nylon market will be unable to absorb any higher costs,” a third major producer said.

Caprolactam, a benzene derivative, is a key feedstock for nylon 6.

Major suppliers of caprolactam in Asia include Ube Industries, China Petrochemical Development Corp, Capro Corp, Sumitomo Chemical, BASF and DSM Nanjing Chemical.

($1 = CNY7.00)

($1 = €0.64)

For more on caprolactam, visit ICIS chemical intelligence.

By: Hsin Hun Wan
+65 6780 4359

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