FocusCaprolactam price falls in Asia put pressure on Europe capro

17 May 2012 15:35  [Source: ICIS news]

By Mark Victory

LONDON (ICIS)--Weak Asian caprolactam demand has placed downward pressure on European prices, and some players are concerned that new production capacity in Asia could further weaken buying interest.

Asian caprolactam spot prices have lost 15-18% of their value since 15 February, when prices were trading at $2,950-3,000/tonne CFR (cost and freight) China, as a result of low consumption.

Asian caprolactam spot prices continued to plummet this week, falling by $50-150/tonne, to $2,430-2,550/tonne CFR China, because of declining upstream Asian benzene prices.

“Since last week, the market has collapsed. Customers want below $2,500/tonne CFR China. There’s low interest, no-one wants to buy. The problems in Greece have reared up again,” a caprolactam exporter said.

Benzene prices in Asia reached a four-month low on 15 May, tracking falls in crude futures.

Asia is a major importer of European caprolactam. The lack of demand there has led to material previously earmarked for Asia remaining in Europe, increasing supply.

European April caprolactam contract prices settled at €2,150-2,220/tonne FD (free delivered) NWE (northwest Europe). European May caprolactam contract negotiations are being stalled by uncertainty with the majority of buyers and sellers unwilling to conclude discussions until the future direction of prices becomes clearer.

The uncertainty is in part being caused by the steep drop in Asian caprolactam prices since mid-February.

Current pricing levels in China, which equate to €1,920-2,015/tonne CFR, mean that there are no arbitrage opportunities, European exporters said.

The reduced export demand is not linked to new production in Asia, as this has been counterbalanced by local production outages but is predominantly due to low consumption, according to sources.

“Asian prices have been lower than Europe for a while now... the impact of new capacities has been limited because of maintenance... weak demand is the main driver,” a caprolactam buyer said.

Taiwanese producer China Petrochemical Development Corp (CPDC) has delayed the restart of its caprolactam plant in Toufen until late June due to technical difficulties, a company source said.

The unit, which has two 100,000 tonne/year lines, was supposed to be brought on line this month after maintenance that started on 15 April. The company, which is the sole caprolactam producer in Taiwan, has another 100,000 tonne/year plant, at Xiaogang, which is currently running at 100% capacity, the source said.

Nevertheless, there are concerns that expanding caprolactam capacity in Asia will reduce imports from Europe in the long-term, significantly impacting on European demand in the mid-to-long term.

“When the Chinese started producing PET bottles, it destroyed the market. The same thing happened with lycra... we think the same will happen on capro. Asia has proved they can make caprolcatam plants for themselves,” a caprolactam buyer and nylon producer said.

Other players, think that the production expansion in Asia is too limited to have a significant effect on global structural supply in the short-term, but are concerned that extra capacity in Asia could add “psychological” downward pressure on an already weakening market. There are also fears that the extra-capacity is the beginning of a long-term trend that could see a reduction in the importance of European caprolactam in the global market-place.

“What happened with PET and LYCRA is a possible scenario [for caprolactam]. But it’s only 100,000-200, 00 tonnes/year [of extra capacity]. But perhaps the psychological effect will be important,” a caprolactam and nylon producer said.

Asian players are worried that the start-up of new capacity at the end of the month will further weaken market sentiment and exert downward pressure on prices.

China's Baling Petrochemical and Sinopec Maoming Company, plan to build a 200,000 tonne/year caprolactam plant at Maoming in southern Guangdong province, a local government source said.

The two companies, both subsidiaries of state-owned Sinopec, signed a Letter of Intent for the construction with the local Maoming government on 26 April, the source added. Construction is expected to start sometime this year but an actual date was not immediately known.

China’s Zhejiang Baling Hengyi Caprolactam plans to start up a 100,000 tonne/year caprolactam line in Hangzhou, Zhejiang province, in mid-May, a company source said.

The line is one of two 100,000 tonne/year lines at the producer’s caprolactam plant, said the source. The producer is expected to achieve on-spec production at the line at end of May if the test run goes smoothly, the source said.

Low consumption in Asia is having a knock-on effect on downstream nylon 6 (or polyamide 6) demand in Europe.  Although nylon  6 is not exported to Asia in high volumes, Asia is a major purchaser of finished goods derived from nylon, such as automotives and textiles.

Traditionally May would be peak season for textiles, but buying interest has been weak in 2012 because of bearish macro-economic sentiment and fears over the contagion risk of the eurozone debt crisis.

Bearish general economic conditions have limited consumer purchasing power, suppressing demand from the end-use small- and mid-sized automotive manufacturers.

A heavy public holiday schedule across Europe has further limited buying interest in May.

The majority of European nylon 6 May contract price negotiations are yet to conclude, although several May agreements have already been finalised at a price level of €2.30/kg FD NWE for virgin polymer, as a result.

Players that have already concluded May nylon 6 negotiations said that their price levels had fallen by as much as €0.15/kg compared with April because of weak demand.

Although European caprolactam players are yet to set firm May contract price targets, buyers are arguing for sharp falls because of the need to restore margins in downstream nylon 6.

“There’s a sharp drop in margins, it can’t only be us [in nylon 6 production] sacrificing. We need to see the same sacrifices as on nylon,” a caprolactam buyer and nylon 6 producer said.

Caprolactam producers had originally targeted a rollover for May prices, but some now accept that this may not be realistic, and players on both sides are uncertain about where prices will eventually finalise.

“We’re trying for a rollover, but we feel that we can’t make it this month on pressure and volumes," said a caprolactam producer.

($1 = €0.79)

Additional reporting by Junie Lin

By: Mark Victory
+44 208 652 3214

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