19 September 2011 00:00 [Source: ICB]
Yarn spinners say feedstock costs have cut deeply into margins
Asian caprolactam (capro) prices have been rising since June, buoyed by tightness in supply, but with demand flagging downstream in the market for nylon 6 (or polyamide 6) yarn, they may soon reach a ceiling.
Producers in Europe have been following the increases and believe Asian capro prices have reached a level that should support their own price hikes. Asian capro still has momentum. A sizeable portion of September contracts settled during the first week were done at $3,450/tonne (€2,530/tonne) CFR (cost & freight) NE (Northeast) Asia, while some were being negotiated at $3,470-3,500/tonne - an increase of $50-70/tonne over the $3,400-3,430/tonne of August.
YARN SPINNERS STRUGGLE
When offers for the month emerged in late August, they were $3,500/tonne CFR NE Asia. By early September, $3,550/tonne was being proposed. Both sides wanted to finish before the Mid-Autumn Festival began on September 12.
Producers seemed confident. "I have a supplier who insisted on $3,500/tonne CFR NE Asia," a Northeast Asian buyer said. "If I insisted on paying $3,450/tonne, my volumes [would] be cut." Spot prices during the same period indicated caution, however. After rallying $40/tonne the week before, capro slipped $20/tonne at the high end to $3,580-3,620/tonne CFR NE Asia.
The figure is only $100/tonne short of the upper limit China-based capro major Sinopec forecasted in March, when spot prices peaked at $3,580-3,610/tonne CFR NE Asia. "We see little room for prices to go up any further, as downstream industries are increasingly finding it tough to pass on costs," company representative Fang Fang said at the time.
Almost six months later, the situation has not improved for yarn spinners. Feedstock costs have cut deeply into margins, they say, while customers are turning to cheaper polyester yarn. "It's already end-August, and there is no sign of recovery before the peak season," one complained. September and October are typically the most active time for nylon.
Offers for deep-sea cargoes loading in October slipped more than $50/tonne during the week ending September 7 to about $3,620-3,630/tonne CFR China on an LC 90-day basis, reflecting the deeply uncertain outlook for downstream markets.
Market sources doubt whether high spot prices can be sustained, although it is expected that a host of turnarounds in the fourth quarter will tighten supply. South Korea's Capro Corp. will enter its turnaround in early October. Sumitomo Chemical will also take down its two capro lines, capable of producing 180,000 tonnes/year, for scheduled maintenance at the end of October for more than one month. Taiwan's China Petrochemical Development Corp. is considering whether to shut down its newly debottlenecked 200,000 tonne/year capro unit at Xiaogang in Kaohsiung for a 45-day turnaround in December. There will be also be turnarounds by Japan's Toray and Sinopec's Baling.
A string of nylon chip expansions could further squeeze the market. According to one yarn maker, China will bring 390,000 tonnes/year of new downstream nylon chip capacity on stream in the next six months.
In Europe, August capro contracts were settled late in the month with rises of €100/tonne ($136/tonne) during July. Pre-discounted contracts were settled at €2,692-2,748/tonne FD (free delivered) NWE (Northwest Europe), putting prices on a net basis at €2,250-2,350/tonne FD NWE.
A TUG-OF-WAR IN EUROPE
As in July, the first capro settlements were made ahead of the August benzene contract, which settled at €886/tonne FOB (free on board) NWE, up €132/tonne from July. According to market sources, these early settlements were concluded at €90/tonne over July levels and disappointed sellers, given the hike in feedstock benzene.
A number of capro suppliers, citing the supply/demand situation, were pushing for increases up to €150/tonne for August, but most now concede a €100/tonne increase was representative.
"The only reason for the full benzene [increases] not being passed to the capro market was that it was August vacation time, with significant absence," remarked one producer.
With September open, suppliers have set price targets ranging from a slight decrease to a rise of €50/tonne. However, they may have a fight on their hands.
An initial European September benzene contract has been settled at €819/tonne, down €67/tonne from August, and capro buyers want the entire decrease passed along. They say deteriorating economic conditions will weigh on demand for the rest of 2011. To minimize risk, they are purchasing on a just-in-time basis. They also say the downstream nylon 6 market cannot absorb more cost rises. Capro contracts rose €100/tonne in August, but nylon 6 prices rolled over, and they are expected to do so again this month.
Some producers concede that lower benzene values will lead to reduced capro prices, but they also say strong demand will minimize any decrease. Producers targeting increases argue that supply in Europe remains tight following recent and ongoing force majeures, and there is a need to close the gap between European and Asian prices.
Buyers acknowledge that supply is tight, but they also say availability is improving because of weak demand in August owing to end-user vacation outages.
Views on consumption are mixed, depending on end-use. Demand from construction applications and BCF fibers remains weak because of poor financial conditions in these markets, but automotive and fiber demand remain strong, with buying interest high because of exports to Asia. Downstream consumers have seen no slowing in growth for automotives, despite deteriorating global economic conditions.
Includes reporting by Junie Lin in Singapore, and Julia Meehan and Sian Jones in London
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