FocusEurope caprolactam chain margin fears remain despite recovery

24 October 2013 13:12  [Source: ICIS news]

By Mark Victory

LONDON (ICIS)--Despite European caprolactam (capro) chain spread recovery in 2013 and an optimistic demand outlook for nylon 6, there remain threats to margins in 2014, sources said this week.

Contract prices of cyclohexane (CX) - the feedstock for the polyamide chain - have fallen by €219/tonne ($300/tonne) since the beginning of 2013. The monthly CX contract price is comprised of the sum of the monthly benzene contract price and the CX quarterly delta contract price.

During the same period, nylon 6 (or polyamide 6) virgin polymer prices are at the same levels as they were at the start of the year, while caprolactam (capro) contract prices have fallen by €67-85/tonne.

This represents a contract price spread recovery against CX across 2013 to date of €219/tonne for nylon 6 and 6,6, and €134-152/tonne for capro.

Coupled with this, several European engineering plastics producers expect demand from the sector to grow in 2014, as they have had increased enquiries for new applications.

Engineering plastics are a key end-use market for nylon 6 and 6,6. Engineering plastics are predominantly used in automotive manufacture, but can also be used for other downstream applications such as electronics.

The expectation of strong demand in Q1 2014 derives from approaches from new customers at the K2013 plastics fair in Dusseldorf, Germany, for new applications.

"Positive K, which is good news. There were a tremendous amount of people. Many people are looking at innovations, etc. I think Europe is showing its technology advantage [over other regions]," a nylon compounder serving the engineering plastics sector said.

Automotive demand has been weak in 2013. EU new passenger car registrations for January-August this year were at their lowest ever level, declining by 5.2% year on year, according to the European Automobile Manufacturers’ Association (ACEA).

Engineering plastics serving the premium automotive market, though, have remained resilient. Demand from the premium automotive sector has been driven by exports of finished goods to Asia, fuelled by upward social mobility.

Nevertheless, there remain concerns that increased competition from Asia in 2014 will reduce capro prices, at the same time as consolidation in the European CX market could push feedstock costs higher, causing concern that margins will once again fall under pressure in 2014. In addition, nylon 6 and capro demand has been previously forecast to remain stable with 2013 levels in 2014.

An additional 500,000 tonnes of capacity is planned to come online in China in 2014 and European capro players fear this will place additional downward pressure on European prices.

Asia – in particular China – has traditionally been a major export market for European capro. Although additional capacity in China has come on stream in 2013, technical problems at new plants and delays to plants reaching high grade material production have shielded Europe from the impact on export demand.

This export demand is expected to dramatically reduce in 2013 because of the new capacity. Exports have remained firm throughout 2013, which several sources have attributed in recent weeks to problems starting up production at the new Asian plants.

"It [the Chinese expansion] will affect our margins of course, in my view capro will further go down, but it will have a bottom, nobody knows where that is. Europe will be a reflection of what's happening in Asia, but it's crystal ball looking," a capro producer said.

Nevertheless, at least two plants in China are now producing material which is indistinguishable from high-grade European material, sources said.

There are concerns that the additional competition from the new capacity in 2014 will result in lower prices in the region, closing off arbitrage opportunities.

The knock-on effect will be that material previously earmarked for export to Asia will remain in Europe. Because Europe is structurally oversupplied, this will create a perpetually long market, creating downward price pressure, some sources fear.

At the other end of the chain, European CX consolidation has led to fears of squeezed downstream margins.

Speaking on the sidelines of the 47th annual European Petrochemical Association (EPCA) meeting in Berlin from 5-9 October, sources throughout the polyamide chain said that fewer producers of CX in Europe could lead to higher prices due to increased premiums to ensure supply.

This is because supply disruptions at a single supplier will have a larger impact on the wider market, and will mean that producers may be able to charge a premium for buyers to secure material.

The concerns emerged following BP’s announcement in September that it will close its CX plant in Lingen, Germany, at the end of 2013 because of poor profitability.

The plant has a nameplate capacity of 260,000 tonnes/year and is the fourth largest CX plant in Europe, according to ICIS plants and projects.

The closure of the Lingen plant follows Total’s exit from European CX production in 2012.

($1 = €0.73)

By: Mark Victory
+44 208 652 3214

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