INSIGHT: Asian caprolactam volatility set to stay

27 September 2011 16:43  [Source: ICIS news]

By Junie Lin

SINGAPORE (ICIS)--Tight supply has forced a period of unparalleled price volatility on producers and consumers of caprolactam since March last year. Players expect the volatility to persist until 2015.

The pressure to maintain margins by passing feedstock price hikes on to downstream customers has been immense along the whole value chain in Asia. However, the success of price changes has depended on the strength of downstream demand right down to the end-consumer.

Cost pass-through has been a feature of the industry, albeit with a time lag, but there comes a point when there is a danger of demand destruction, driven by product substitution or even a decision by customers downstream to cease manufacturing.

Since the second quarter this year, for example, the downstream nylon (or polyamide) spinning yarn and tyre cord sectors have found it difficult to pass on costs, and since May sales have tumbled.

At the other end of the chain, global caprolactam suppliers, especially Asian producers, have been enjoying superb margins. Caprolactam spot and contract prices have completely detached themselves from raw material benzene costs.

Supply shortages have contributed to the price hikes and the sterling performance of caprolactam.

Typical caprolactam break-even costs are around $1,200/tonne (€888/tonne) from benzene, according to market players.

Given that September 2011 caprolactam prices have been assessed by ICIS at $3,450–3,490/tonne CFR (cost and freight) NE (northeast) Asia, and with benzene hovering around the $1,000/tonne FOB (free on board) Korea mark, rough estimated producer margins are around $1,250/tonne.

For producers, based on this calculation, there is much to be happy about.

But since March last year, according to both producers and consumers, the challenge has been twofold: volatility and high prices.

Volatility has been caused by the large pool of small to large traders speculating on spot values on a daily basis.

Caprolactam spot prices hit record highs of $3,580–3,640/tonne CFR NE Asia at the end of August, 14% or $460/tonne higher than prices just three months earlier.

"The spot price can go up by more than $100/tonne in a week, then the market can go silent for weeks in a row, and next we hear spot prices tumbled by more than $150/tonne overnight,” said a trader.

Volatility in spot caprolactam prices – because of tight long-term supply-and-demand balances – could also be here to stay, making the life of any sales or purchasing manager very difficult.

Caprolactam demand in Asia is pegged at 5.3m tonnes/year, outstripping Asian production capacity of 4.8m tonnes/year.

Supply is expected to further tighten this year and next as new facilities and expansion projects for nylon polymerisation come on stream.

For instance, China is expected to see some 390,000 tonnes/year of new downstream nylon chips capacity come on stream in the next six months, according to a downstream yarn maker.

Global caprolactam consumption is estimated to have increased by 6% in 2010 from 2009 and is forecast to grow by an average 3.5% a year from 2010 to 2015, with slower growth of around 2.2% a year from 2015 to 2020.

Almost all caprolactam is used for nylon 6 production. Some 53% is used to make nylon 6 fibres and around 32% is used to manufacture nylon 6 plastics.

But what is likely to happen after 2015?

The world’s largest caprolactam consumer, China, could switch from being a net importer to a net exporter thanks to caprolactam capacity expansions.

Chemicals giant Sinopec, for instance, aims to reduce its dependency on imports by building caprolactam plants in the country. Many other major producers are already conducting feasibility studies for capacity expansions of more than 200,000 tonnes/year, and this is on top of a string of new caprolactam projects put forward by newcomers.

China is expected to export more caprolactam to feed new nylon plants being installed in southeast Asian nations with lower labour costs.

In recent years, Taiwanese textile manufacturers have invested increasing amounts to set up or expand their operations in Vietnam.

Taiwan’s Formosa Chemicals and Fibre Corp (FCFC) has already jumped on the bandwagon. It started up a 5,000 tonne/month nylon chips plant in Vietnam in August, adding an annual caprolactam requirement of 60,000 tonnes/year.

One major Japan-based producer said: “South China’s Fujian port possesses [a] strong geographical advantage for exporting caprolactam in the next three to five years”.

Furthermore, southeast Asian countries are, at least for now, sheltered from trade disputes.

Most major Taiwan-based nylon chips producers have to pay an antidumping duty (ADD) of 4.0–4.3% when they export products to China, based on a ruling made by China’s ministry of commerce.

Currently, there are no antidumping duties imposed on nylon from Vietnam.

And any new nylon chip facilities outside China are also cushioned from China’s ADD measures for their feedstock caprolactam supply.

China imposed temporary provisional duties ranging from 4.3% to 25.5% on caprolactam imported from the US and the EU from 25 January 2011.

($1 = €0.74)

By: Junie Lin

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