28 May 2012 00:00 [Source: ICB]
Weak Asia caprolactam (capro) demand has placed downward pressure on European prices, and some market players are concerned that new production capacity in Asia could further weaken buying interest.
Asia demand fails to support caprolactam prices
"Since last week, the market has collapsed," a capro exporter said. "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."
Benzene prices in Asia reached a four-month low on May 15, tracking falls in crude futures.
Asia is a major importer of European capro, but with demand there low, material earmarked for Asia has remained in Europe, increasing supply and obscuring the outlook.
IN A HOLDING PATTERN
The resulting uncertainty has stalled May contract negotiations among Europe's capro players, and as of May 17, a majority of buyers and sellers had not concluded discussions, preferring to wait until the trend became clearer.
April capro contracts in Europe settled at €2,150-2,220/tonne FD (free delivered) NWE (northwest Europe).
Pricing levels in China, which equated to €1,920-2,015/tonne CFR midway through May, mean that there are no arbitrage opportunities, European exporters said.
New capro production capacity in Asia has been counterbalanced by production outages, according to sources.
"Asian prices have been lower than Europe for a while now," a capro buyer said. "The impact of new capacities has been limited because of maintenance. Weak demand is the main driver."
Taiwanese producer China Petrochemical Development has delayed the restart of its capro 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 capro producer in Taiwan, has another 100,000 tonne/year plant, at Xiaogang, which is currently running at 100% capacity, the source said.
CLOUDS ON THE HORIZON
Some participants in the European market are concerned that the current situation may be the shape of things to come. Expanding capro production capacity in Asia could reduce imports from Europe, significantly affecting European demand in the mid to long term and ultimately diminishing the role of European capro in the global marketplace.
For example, China's Zhejiang Baling Hengyi Caprolactam plans to start up a second 100,000 tonne/year capro line in Hangzhou, Zhejiang province, in mid-May. The producer hopes to achieve on-spec production on the line in late May, according to a source within the company.
Meanwhile, a 200,000 tonne/year capro plant at Maoming, in southern Guangdong province, is being planned by two subsidiaries of China state-owned Sinopec, Baling Petrochemical and Sinopec Maoming Company. A local government source told ICIS that the companies signed a Letter of Intent with the local Maoming government on April 26, and construction is expected to begin this year.
The PET and lycra markets offer precedents for such worries.
"When the Chinese started producing PET bottles, it destroyed the market," one capro buyer and nylon producer said. "The same thing happened with Lycra, [and] we think the same will happen on capro. Asia has proved they can make caprolactam plants for themselves."
Other sources believe that production expansions in Asia are too limited to significantly structurally affect global supply in the short-term, but they do worry that extra capacity in Asia could put downward "psychological" pressure on an already weakening market.
"What happened with PET and Lycra is a possible scenario," said a producer of capro and nylon. "It's only 100,000-200,000 tonnes/year [of extra capacity] - but perhaps the psychological effect will be important."
Asia players have fears of their own. They worry that the start-up of new capacity at the end of the month will further weaken market sentiment and exert downward pressure on prices.
NYLON MARGINS NARROW
Overall reduced 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 tires and textiles.
Traditionally May would be peak season for textiles, but buying interest has been weak this year because of bearish economic sentiment and fears that the eurozone debt crisis could become a global contagion.
Bearish conditions in general have limited consumer purchasing power, suppressing nylon demand from the small and mid-sized automotive manufacturers, while a heavy schedule of public holidays throughout Europe this month has further reduced buying interest.
The majority of European nylon 6 May contract price negotiations had not concluded by May 17, although several May agreements had been finalized at a price level of €2.30/kg FD NWE for virgin polymer. Market players who had already concluded nylon 6 negotiations for May said that their price levels had fallen by as much as €0.15/kg compared with April because of weak demand.
Although European capro players had yet to set firm May contract price targets, buyers were arguing for sharp cuts because of the need to restore margins in downstream nylon 6.
"There's a sharp drop in margins," a capro buyer and nylon producer noted. "It can't only be us [nylon 6 producers] sacrificing. We need to see the same sacrifices as on nylon."
European capro producers had originally targeted a rollover for May contracts. By May 17, however, some were acknowledging that the goal might be unrealistic, and players on both sides were uncertain about where prices will eventually finalize.
"We're trying for a rollover, but we feel that we can't make it this month on pressure and volumes," said a capro producer.
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